The Lighthouse Contract Protocols 2026

Parties considering an "amendment" to the Con­tract should consider whether what they really want is simply one party's waiver (see Protocol 3.18) of a particular right or obligation.

According to Black's Law Dictionary (the canonical English-language legal dictionary), an amendment is "[a] formal and usu. [usually] minor revision or addition proposed or made to a statute, constitution, pleading, order, or other instrument …."

Here's a hypothetical example: Imagine a contract between Alice and Bob. Suppose that the contract calls for Bob to take care of Alice's lawn; Bob's obligations include mowing the lawn each week, raking leaves in the autumn, etc.

Now suppose that on one particular day, Alice comes outside to talk to Bob when she arrives to mow the lawn.

• If Alice says, "Hi Bob — I don't need the lawn mowed this week." That's known as a waiver, by Alice, of Bob's obligation for that occasion.
• Or, Alice might say, "never mind, Bob, I don't need you to mow the lawn ever, because my teen-aged son wants to do it from now on — so let's talk about changing the contract to reduce what you have to do and also reduce what I pay you." If Bob agrees, that's known as an amendment of their contract.

Drafters: If you'll be making extensive changes to a contract — or if there have already been multiple amendments to the same contract over time — then consider doing a complete "amended and restated" agreement, with that title.

Example: The title of one Enterprise Products Partners limited-partnership agreement is, "Seventh Amended and Restated Agreement of Limited Partnership of Enterprise Products Partners L.P." (emphasis added).

Caution: If doing an amended-and-restated agreement, you'll want to consider whether you could be wiping out a provision that your client might later want to rely on. Example: That was the result in a case where:

• an earlier contract contained a payment guaranty;
• an amended and restated contract didn't contain the guaranty.

Presumably this was to the chagrin of the creditor that, as a result, didn't get paid. See Electronic Merchant Systems v. Gaal, 58 F.4th 877 (6th Cir. 2023) (affirming dismissal of creditor's suit against guarantor for failure to state a claim).

In the amendment's title, strongly consider including a series number and date — and perhaps even include a (brief) mention of the amendment's purpose — to leave a paper trail, reduce the chances of confusion, and make it easier for a reader to find the amendment when skimming a list of document titles.

Example:

If making further amendments to Amendment No. 1 itself, consider:

This is especially important to consider when multiple amendments have occurred. Example: The members of a limited-liability company ("LLC") agreed to amend the LLC's operating agreement when its managing member resigned — that amendment was the ninth one. See Paul v. Rockport Group, LLC, No. 2018-0907-JTL (Del. Ch. Jan. 9, 2024) (granting summary judgment in favor of plaintiff, the LLC's former managing member).

For tips on drafting amendment signature blocks, see 3.16 and especially 29.4 — the format would likely be exactly the same as for the contract itself.

See also Protocol 3.15 (signature-document integrity) and Protocol 3.16 (signature mechanics).

Sometimes a contract will be amended to resolve a disagreement between the parties. If that happens, a release might be drafted so broadly as to cause other rights to vanish.

Example: In a federal-government contracting case, fact issues precluded summary judgment whether a contract modification had effected a release of certain other claims, so that the contractor would be barred from asserting those other claims against the government. (The parties settled the case three months thereafter.) See Fortis Indus., LLC v. GSA, CBCA 7967, slip op. at 4-5 (Sept. 18, 2024), settled (Jan. 29, 2025).

Drafters of amendments should watch out for possible unwanted "side effects," in which an amendment to one provision turns out to affect one or more other provisions as well. This can be a particular problem when defined terms are used, as discussed in Kidd (stephens-bolton.com, undated).

This, incidentally, is one reason for contract drafters to follow the D.R.Y. Principle (see at 30.4) — that is, Don't Repeat Yourself, usually — to try to reduce such intra-draft "dependencies," and thus the possibility for inconsistent revisions to the draft during negotiations.

In ongoing business relationships, contracts might be amended multiple times. At some point in the future, it might be easy to overlook a previously-signed amendment — and then be caught by surprise in a future discussion (friendly or otherwise).

For that reason, parties should save any signed amendment document in a place where it will be noticed by later readers of the contract. (This should be a routine thing for businesses already.)

Technically, a binding written document amending the Con­tract could be an exchange of emails — or even an exchange of text messages. Example: In a lawsuit between a digital ad agency and one of its clients, an e-cigarette manufacturer, an IM exchange resulted in the manufacturer's having to pay the agency more than $1 million in additional fees:

• The crux of the IM exchange started with a message from an account executive at the ad agency: "We can do 2000 [ad placement] orders/day by Friday if I have your blessing."
• The e-cigarette manufacturer's VP of advertising responded: "NO LIMIT"
• The ad agency's account executive responded: "awesome!"

That series of messages served to modify the parties' contract; as a result, the e-cigarette manufacturer had to pay the ad agency the additional fees. See CX Digital Media, Inc. v. Smoking Everywhere, Inc., No. 09-62020-CIV, slip op. at 8, 17-18 (S.D. Fla. Mar. 23, 2011).

A text-message amendment might not be a good idea because:

• it might be overlooked by the relevant business people (see 3.1.4.8);
• it might disappear; and
• even if it didn't disappear, it might be legally ineffective in some jurisdictions, as discussed at 28.3.3.

Similarly, writing and signing an amendment on something like a Post-It note would be inadvisable, even though technically it'd be binding if it was otherwise sufficient.

Applicable law might require "consideration" (see 32.7) for amendments to existing contracts. Generally speaking, this means that each side gets at least some benefit from the amendment.

In Article 2 of the (U.S.) Uniform Commercial Code — which in general applies to transactions that are predominantly for the sale of goods — section 2-209(2) provides as follows:

(1) An agreement modifying a contract within this Article needs no consideration to be binding.

(2) A signed agreement which excludes modification or rescission except by a signed writing cannot be otherwise modified or rescinded, but except as between merchants [basically, regular buyers and sellers of goods of the kind] such a requirement on a form supplied by the merchant must be separately signed by the other party.

(3) The requirements of the statute of frauds section of this Article (Section 2-201) [which requires certain contracts to be in writing] must be satisfied if the contract as modified is within its provisions.

(4) Although an attempt at modification or rescission does not satisfy the requirements of subsection (2) or (3) it can operate as a waiver.

(5) A party who has made a waiver affecting an executory portion [i.e., a not-yet-started portion] of the contract may retract the waiver by reasonable notification received by the other party that strict performance will be required of any term waived, unless the retraction would be unjust in view of a material change of position in reliance on the waiver.

One not-uncommon use case for an entire-agreement clause might be if parties enter into a written confidentiality agreement, or "NDA," to replace a previous, informal, oral agreement to keep information confidential.

(For more on this point, see § 5.3.3 and 5.3.34.3 in the Confidential Information Protocol (5.3).)

Courts have often held that:

… where two or more written instruments are executed as a part of one transaction such instruments should, when possible, be construed together.

And this rule adheres even where the instruments do not in terms refer to each other.

Where multiple instruments are executed at the same time and are intertwined by the same subject matter, the parol evidence rule does not prevent the court from considering both or all agreements together, notwithstanding the presence of an integration clause. Montes v. National Buick GMC, 2024 UT 42 ¶ 34, 562 P.3d 688, 696 (reversing court of appeals: separate arbitration agreement was part of a car-purchase contract, even though the latter had an integration clause) (cleaned up, extra paragraphing added).

Background: Even with an entire-agreement provision such as that of Protocol 3.3, sometimes a party to a contract (the "claimant") will claim:

• that the claimant was "fraudulently induced" to enter into the contract, due to oral assurances or other statements made by another party; and
• that the other party therefore should be legally liable, even if technically the contract hasn't been breached.

Entire-agreement provisions often include "there are no other representations" language such as that above.

And in some jurisdictions, such a no-other-representations statement might be enough to preclude a party from bringing a claim for fraudulent inducement.

Example: New York law sometimes treats such "no other representations" disclaimers as inherently barring reliance on alleged external representations, and thus as barring claims of misrepresentation. But that happens only in specific circumstances, such as a transaction between large, sophisticated parties. See, e.g., Century Pacific, Inc. v. Hilton Hotels Corp., 528 F. Supp. 2d 206, 229, 230-31 (S.D.N.Y 2007) (granting defendants' motion for summary judgment dismissing misrepresentation claims), aff'd, No. 09-0545-cv, slip op. (2d Cir. Nov. 25, 2009) (summary order).

For other circumstances, the express reliance waiver of Protocol 11.7 might be necessary.

In some circumstances, a contract drafter might want to explicitly state that a party is not waiving reliance on outside statements but instead is indeed relying on such representations. This happened in a Third Circuit case, where the contract in suit said, in part:

The financial terms set forth in this Agreement and other obligations assumed by SodexoMAGIC hereunder are based on conditions in existence on the date SodexoMAGIC commences operations, including by way of example [Drexel's] student population; labor, food and supply costs; and federal, state and local sales, use and excise tax.

In addition, each party has relied on representations regarding existing and future conditions and projections made by the other in connection with the negotiation and execution of this Agreement. SodexoMAGIC, LLC v. Drexel University, 24 F.4th 183, 215 (3d Cir. 2022) (partially reversing summary judgment; emphasis and alterations by the court, extra paragraphing added).

In the Fourth Circuit's Harrell opinion, the court summarized:

Virginia law distinguishes between[:]

• a statement that is false when made and
• a promise that becomes false only when the promisor later fails to keep his word.

The former is fraud, the latter is breach of contract.

Thus, whether the Harrells can recover in tort for the permitting representation depends upon the nature of the statement.

• A statement by DeLuca to the effect of "I have already obtained the necessary permit(s)" is either true or false when made—it does not hinge on any future action—so, if false, it can support a claim for fraud.
• Compare that to a statement by DeLuca to the effect of "I will obtain all necessary permits." That is merely a promise to do something in the future. And while it might constitute breach of contract if he fails to follow through, it cannot sustain a claim for fraud. Harrell v. Deluca, 97 F.4th 180, 190 (4th Cir. 2024) (vacating and remanding judgment for further fact findings; cleaned up, lightly edited).

In footnote 7, the court noted a special case: "There is an exception to this categorical statement in cases where promises are made with a present intention not to perform them." (Cleaned up.)

Similarly, in its Albertsons opinion, Delaware's chancery court noted the difference between a factual misrepresentation and an alleged lie about future intentions:

The gravamen of Plaintiff's fraudulent inducement claim is that Albertsons lied about its "future intent" with respect to the operation of the business post-closing.

While anti-reliance language is needed to stand as a contractual bar to an extra-contractual fraud claim based on factual misrepresentations, an integration clause alone is sufficient to bar a fraud claim based on expressions of future intent or future promises. Shareholder Repr. Serv. LLC v. Albertsons Cos., No. 2020-0710-JRS, slip op. at text acc. nn.128-29 (Del. Ch. Jun. 7, 2021) (footnotes omitted, emphasis added).

(Hat tip: Glenn West.)

And as the Texas supreme court said in Stanley Boot:

To recover for fraud, Petitioners must prove: [list of usual elements omitted]. Because the representation in this case involves a promise to do an act in the future, Petitioners also had to prove that, at the time the Bank's representative made the promise, the Bank had no intention of performing the act. T.O. Stanley Boot Co. v. Bank of El Paso, 847 S.W.2d 218, 222 (Tex. 1992) (affirming court of appeals's reversal of judgment on jury verdict against bank; cleaned up, emphasis added, citations omitted).

An entire-agreement clause usually won't block a claim for fraudulent inducement to enter into the contract in the first place. For that, a drafter would have to include either an express reliance waiver (see Protocol 11.7) or — in some jurisdictions only — a simple statement that there are no external representations (see § 3.3.7.3).

A contract exhibit is generally a standalone document attached to (or referenced in) a contract. Exhibits are often used as prenegotiated forms of follow-on documents such as forms of real-estate deed.

Example: In a commercial real-estate contract between ABC and XYZ, the contract might well include, as an exhibit, an agreed form of warranty deed; the contract might say the following, for example:

(Emphasis added.)

Example: A master services agreement (MSA) might include, as an exhibit, a starter template for statements of work (SOW) to be undertaken under the MSA.

(Caution: The MSA should not require a SOW to be in the form of the SOW exhibit. That's because, for a particular project, the parties might use a different form of SOW but still want to use the MSA.)

Exhibit numbering: Contract exhibits are commonly "numbered" as Exhibit A, B, etc., but that's just a convention. Exhibits could alternatively be numbered with numerals, such as Exhibit 1, 2, etc., or even by reference to section numbers in the body of the contract (see the discussion of schedules below). The important thing is to make it easy for future readers to locate specific exhibits.

Schedules are commonly used in contracts for disclosures of exceptions to representations and warranties in the body of the contract.

Example: In the merger agreement between software giant Symantec Corporation and BindView Corporation (of which I was vice president and general counsel), BindView warranted, among other things, that:

Article 3
Representations and Warranties of the Company

 * * * 

3.2 Company Subsidiaries. Schedule 3.2 of the Company Disclosure Letter sets forth a true, correct [sic] and complete list of each Subsidiary of the Company (each a “Company Subsidiary”). …

Other than the Company Subsidiaries or as otherwise set forth in Schedule 3.2, the Company does not have any Company Subsidiary or any equity or ownership interest (or any interest convertible or exchangeable or exercisable for, any equity or ownership interest), whether direct or indirect, in any Person.

(Italics and extra paragraphing added.)

In other words:

• The reps and warranties in the contract set forth a baseline reference point — a benchmark, a Platonic ideal ; and
• the schedule(s) specify the ways (if any) in which the Company (in this case, BindView) did not conform to that benchmark status.

Schedule numbering: It's conventional to number each schedule according to the section in the body of the agreement in which the schedule is primarily referenced; in the example above, Schedule 3.2 has the same number as section 3.2 of the merger agreement in which that schedule is referenced.

Other materials can be attached to a contract as appendixes, annexes, and addenda; there's no single standard or convention for doing so.

A contract might include one or more addenda, appendixes, exhibits, etc., with additional terms that contradict provisions in the main body of the contract. Which would control?

In an Ohio case, the body of an oil-and-gas lease included an arbitration provision, but an exhibit to the lease stated:

If any of the following provisions conflict with or are inconsistent with the printed provisions or terms of this Lease, the following provisions shall control. * * *

22.  All Disputes Decided in Harrison County Courts — All disputes the parties are unable to resolve between themselves shall be subject to a civil lawsuit. The Courts in Harrison County, Ohio (Common Pleas and County) shall have exclusive jurisdiction over all disputes. Neither party shall be able to either file or remove a case to Federal Court. Denham v. Encino Energy, LLC, 2025 Ohio 1585 ¶ 5 (reversing and remanding denial of motion to compel arbitration).

A trial court denied a motion to compel arbitration, reasoning that the exhibit language meant what it said. But the state supreme court disagreed, asserting that "[a]n arbitration clause and a forum selection clause are not necessarily mutually exclusive because arbitration and litigation are not mutually exclusive." The court distinguished another case in which an addendum had explicitly ruled out arbitration. See id. ¶¶ 19, 21-22.

(DCT note: This strikes me as legislating from the bench by simply reading the "all disputes" language completely out of the addendum provision.)

A contract's silence about exclusivity could be interpreted as implicitly denying or granting exclusivity.

For example: Suppose that a manufacturer and a distributor enter into an agreement for the distributor to carry one of the manucturer's products in a given territory.

• May the manufacturer grant similar rights to other distributors?
• May the manufacturer engage in distribution activities itself? Or must the manufacturer work exclusively through the distributor?
• Is the distributor's right exclusive in that territory? What about for that particular product?

Courts have gone both ways on those subjects:

Example: A Rhode Island company had a contract with the state to pick up human remains and transport them to the medical examiner’s office.

• The contract said nothing about exclusivity.
• To save money, the medical examiner’s office started having its own people pick up some of the remains; that cut into the company’s business.
• The company sued the state, claiming that its remains pickup contract was exclusive — and thus (said the company) the ME’s office breached the contract by having its own people pick up remains.

The case went all the way to Rhode Island's supreme court — which affirmed a trial court's rejection of the company's exclusivity claim. See JPL Livery Services, Inc. v. Dept. of Admin., 88 A.3d 1134 (R.I. 2014) (affirming trial-court judgment).

Counterexample: A contract between a manufacturer and a Wisconsin dealership was silent about whether the dealer had exclusive rights; that silence — plus the dealer's de facto exclusivity for many years — drew the parties into several years of presumably-expensive litigation in federal court, culminating in what amounted to a final judgment after a jury trial. See Kaeser Compressors, Inc. v. Compressor & Pump Repair Services, Inc. 781 F. Supp. 2d 819 (E.D. Wis. 2011) (granting in part, but denying in part, manufacturer's motion for summary judgment); 832 F. Supp. 2d 984 (E.D. Wis. 2011) (findings, conclusions, and order of judgment).

Similarly, a gravel-mining lease in Alaska was silent as to whether it was exclusive; the state's supreme court held that the lease was ambiguous about whether it was exclusive — and on remand, the trial court found that the lease was indeed exclusive. See AAA Valley Gravel, Inc. v. Totaro, 219 P.3d 153, 160-61 (Alaska 2009) (vacating and remanding trial-court decision) (footnote omitted), after remand, 325 P.3d 529 (Alaska 2014) (affirming trial-court judgment).

It should be obvious, but if a party commits to an exclusive deal with another party, the first party would be limiting its freedom to do business with others — even though that could turn out to be important in the future.

For example: An exclusivity clause might weaken a party's future resiliency against adverse events such as the COVID‑19 pandemic, dockworker strikes, and the like: An uncooperative vendor might try to wield an exclusivity clause against a desperate customer seeking alternative sources of goods, even though the supplier might not be able to deliver. True, the customer might be able to invoke force majeure, but that could be small comfort if it led to costly litigation with the supplier.

Violating an exclusivity clause can lead to serious consequences. Example: In a New York case, e-commerce giant Amazon entered into a nonbinding letter of intent ("LOI") to negotiate a lease for space in a building on the Avenue of the Americas in New York City (the "Avenue building").

• The LOI included an exclusivity clause prohibiting Amazon from negotiating for other local space during a stated exclusivity period.
• But while Amazon and the Avenue building owner were negotiating the formal lease, Amazon not only secretly shopped elsewhere, it signed a lease for other space — leaving the Avenue building owner stuck with the cost of extensive renovations that Amazon had requested.

The trial court granted the Avenue building owner's motion for summary judgment that Amazon had breached the LOI. See DOLP 1133 Properties II LLC v. Amazon Corporate, LLC, 2020 N.Y. Slip Op. 30274(U), No. 653789/2014 (N.Y. Sup. Ct. Jan. 6, 2020) (partly granting Avenue building owner's motion for summary judgment); see also DOLP 1133 Properties II LLC v. Amazon Corporate, LLC, No. 653789/2014, slip op. at 8 (N.Y. Sup. Ct. Aug. 17, 2015) (denying most of Amazon's motion to dismiss).

There was doubtless a "political" angle to the case — and in litigation, political considerations can indeed matter: Not even a year beforehand, Amazon had backed out on its highly-visible selection of the borough of Queens as the location of its planned second headquarters. This followed intense community backlash after the selection was announced, which was widely reported in the press. See, e.g., J. David Goodman, Amazon Pulls Out of Planned New York City Headquarters, N.Y. Times, Feb. 14, 2019.

A nonbinding LOI for a private-equity investment agreement included both a statement of the parties' intent to draft a definitive agreement and an exclusivity provision precluding the investment target from engaging with other prospective investors. The deal fell apart, and litigation ensued; the federal court in Manhattan held that, for pleading-sufficiency purposes, the investiment target had plausibly alleged, in its counterclaim, that the private-equity firm breached an obligation to negotiate in good faith. See Cambridge Capital LLC v. Ruby Has LLC, 565 F. Supp. 3d 420, 441, 443 (S.D.N.Y. 2021) (denying that part of Cambridge Capital's motion to dismiss counterclaim), distinguished in 37celsius Capital Partners, L.P. v. Intel Corp., No. 24-2794, slip op. at 10-11 (7th Cir. Dec. 23, 2025) (affirming summary judgment in favor of Intel).

Consider the following hypothetical situation:

• Two parties, which we'll call "Alice" and "Bob" (following a practice in the tech world), are negotiating a contract.
• A third party, "Carol," comes along to offer Alice a better deal.

In that situation, Bob might try to claim that Alice had implicitly agreed to negotiate exclusively with Bob for some period of time. And that, perhaps, could result in Bob's suing Carol for tortious interference with Bob's contract with Alice.

Example: That's approximately what happened in the legendary Pennzoil v. Texaco case, where in a Houston state-court trial, Pennzoil won a jury verdict of some $29 billion (in 2025 dollars) against Texaco for tortiously interfering with what the jury and the courts found to be a binding memorandum of understanding between Pennzoil and Getty Oil. The size of the verdict, and the state-law requirement that Texaco post a appeal bond of the same amount, eventually forced Texaco to file for bankruptcy protection. See Texaco, Inc. v. Pennzoil Co., 729 S.W.2d 768 (Tex. App.—Houston [1st Dist.] 1986, writ. ref’d n.r.e.).

What all this means:

• When you're drafting a contract, and your client is granting certain rights to another party, then it might be "cheap insurance" to use an extra word or two to specify the extent (if any) to which the grant is exclusive — or just say "non-exclusive" if that's in fact the parties' intent.

• On the other hand: If your client is getting a right of some kind, you should seriously consider stating explicitly that the grant is indeed exclusive, again assuming that’s in fact the intent.

In a 2024 federal-court case, a battery manufacturer terminated an exclusive distribution agreement for uncured breach by the distributor and sued the distributor for breach. The distributor counterclaimed, alleging (among other things) that the manufacturer had itself breached the agreement by lining up a replacement distributor before the effective date of termination. The court dismissed the counterclaim, holding:

First, the exclusivity clause did not survive the termination of the contract. … Second, the plain language of the exclusivity clause does not prohibit C&D from negotiating with another party during the lifetime of the Agreement, nor does it prevent C&D from agreeing to enter into an agreement with a third party after the termination of the Agreement. C&D Techs., Inc. v. Elliott Auto Supply Co., No. 23-2608, slip op. at part III (E.D. Pa. Sept. 27, 2024) (emphasis added).

Example: The owner of the Stetson cowboy hat brand found itself faced with a lawsuit by one of its licensed manufacturers and distributors, claiming that the license was supposedly exclusive. Stetson denied the claim, but ironically, Stetson reportedly couldn't find a copy of the actual license agreement. See Jef [sic] Feeley, Stetson’s Iconic Cowboy Hat Triggers Dispute With Haberdasher (Bloomberg.com 2022) (paywalled), reprinted at Stetson hats suing distributor, says sales license not exclusive (NWAOnline.com 2022).

For a very-useful list of bullet points to consider about possible exclusivity deals — including triggers for earning, or losing, exclusivity — see Gleason & Klaber (2024)

Drafters and reviewers should do an appropriate review of any material incorporated by reference, because the material likely will have the same force and effect as though it had been reproduced in the body of the document itself — possibly with unhappy results.

Example: An LOI-style term sheet (see Protocol 3.11 and its notes) incorporated by reference a confidentiality agreement ("NDA"; see Protocol 5.3). The NDA included an exclusion of various types of damages. The Seventh Circuit held that the exclusion — incorporated by reference into the LOI despite the plaintiff's objection — precluded the plaintiff from recovering expectation damages for breach. See 37celsius Capital Partners, L.P. v. Intel Corp., No. 24-2794, slip op. at 13-14 (7th Cir. Dec. 23, 2025) (affirming summary judgment in favor of Intel).

Colorado's supreme court, citing other state supreme-court opinions, noted that:

… for contract terms outside the four corners of a contract to be incorporated by reference into the contract, the terms to be incorporated generally must be clearly and expressly identified. …

General or oblique references to a document to be incorporated, in contrast, are usually insufficient to support a finding that the document was incorporated by reference. French v. Centura Health Corp., 2022 CO 20, 509 P.3d 443, ¶ 30-31 (Colo. 2022) (reversing court of appeals; extra paragraphing added, citations omitted). The French case is described in a Washington Post article: See Timothy Bella, She expected to pay $1,337 for surgery. She was billed $303,709 (WashingtonPost.com May 19, 2022).

This general rule is likely to apply with special force in insurance policies. See, e.g., ExxonMobil Corp. v. Nat'l Union Fire Ins. Co., 672 S.W.3d 415 (Tex. 2023) (reversing and remanding appeals court's reversal of summary judgent in favor of Exxon).

And wording can matter, with much depending on the court. Example: The "Warranty" section of one contract stated: "For a complete list of our Terms & Conditions and Warranty details, please visit our website at [omitted]." Affirming denial of a motion for prevailing-party attorney fees, the First Circuit noted the general consensus that for external terms to be considered part of a contract, "the contract must clearly communicate that the purpose of the reference is to incorporate the referenced material into the contract." The court held that "[t]his section did not convey a clear message that, by accepting the offer, Holsum would agree to bind itself to further promises (including the fee-shifting term)." Holsum de Puerto Rico, Inc. v. ITW Food Equip. Grp., LLC , 116 F.4th 59, 68 (1st Cir. 2024).

Similarly: The Department of Veterans Affairs asked for quotes to lease an item of surgical equipment. One vendor's representative said, in a transmittal email, "I have attached the quote with the terms and conditions [which included mandatory exercise of renewal options by the VA]; this needs to be part of the contract." That wasn't enough to incorporate the vendor's terms and conditions into the contract, said the Federal Circuit:

The contract’s expressly incorporated FAR clauses provided the agency with complete discretion in exercising the option years. If Beacon Point intended to vary the terms of these FAR clauses by incorporating its Quote’s terms and conditions into the contract, it should have ensured that the contract expressly identified* that the Quote’s terms and conditions were incorporated into the contract. Beacon Point did not do so. Instead, Beacon Point accepted a contract that references the Quote but does not clearly communicate that the purpose of the reference was to incorporate the Quote’s terms into the contract. Thus, we hold that the contract does not incorporate by reference Beacon Point’s Quote. Beacon Pt. Assoc. v. Dept. of Veteran Affairs, 139 F.4th 1306, 1310 (Fed. Cir. 2025) (affirming dismissal of vendor's appeal of denial of claim).

Lesson: Drafters would be well-advised to err on the side of explicitness.

If you incorporate external material by reference, but the other party can't readily identify and find the material, then a court might hold that the external material isn't not part of the contract.

Example: A contract form for the sale of hardwood flooring did not successfully incorporate "Terms of Sale," mentioned in the form, said Oklahoma's supreme court, because the contract form gave no indication where to find the referenced terms "beyond doubt" but instead made "nothing more than a vague allusion" to the terms. Walker v. BuildDirect.com Technologies, Inc., 2015 OK 30, 349 P.3d 549, 551, 554 (2015) (on certification from 10th Circuit).

Pro tip: At the very least, provide a Web link — preferably a short, easily-typed one — where the additional incorporated terms can be found.

When you reference external material in a contract, you'll want to be very clear that you intend to incorporate the material by reference. Example: Illustrating this point, in Facilities Cost Mgmt. (Neb. 2015):

• An architectural-services contract stated that "[t]he Architect’s Response to the District’s Request for Proposal is attached to this Agreement for general reference purposes including overviews of projects and services."
• But the architect firm's response to the RFP wasn't attached to the contract — for that matter, the title wasn't even as stated in the contract provision.

Agreeing with the trial court, the state's supreme court held that "[t]he expression 'for general reference purposes,' interesting though it may be [!], contrasts with a provision, common in contract law, which incorporates another document by reference. … [The contract language] simply does not incorporate [the architect firm's] responses into the contract." Facilities Cost Mgmt. Group v. Otoe Cty. Sch. Dist., 291 Neb. 642, 653-54, 868 N.W.2d 67, 71, 75 (2015) (affirming partial summary judgment but reversing and remanding on other issue); after retrial, 298 Neb. 777, 906 N.W.2d 1 (2018).

Caution: It's not hard to see, though, how another court could have held that the contract did incorporate the architecture firm's guaranteed-maximum-price response. Still, the contract's drafters, who presumably worked for the school district, might have been more clear about their client's intent.

In Al Rushaid (5th Cir. 2014), the court held that a supplier's price quotation sufficiently incorporated by reference a standard-terms-and-conditions document published by the European Engineering Industries Association (the "ORGALIME"), which contained an arbitration provision.

– The supplier's price quotation didn't expressly incorporate the ORGALIME by reference; instead, the quotation stated, "Terms and conditions are based on the general conditions stated in the enclosed ORGALIME S2000." (Emphasis added.)

– The Fifth Circuit reviewed Texas law on the point, summarizing that "when the reference to the other document is clear and the circumstances indicate that the intent of the parties was incorporation, courts have held that a document may be incorporated, even in the absence of specific language of incorporation."

The appeals court concluded that "the district court erred in holding there was no agreement to arbitrate." Al Rushaid v. National Oilwell Varco, Inc., 757 F.3d 416, 420-21 (5th Cir. 2014) (reversing denial of motion to compel arbitration) (cleaned up, citations omitted, emphasis added). To similar effect, see CSI Aviation, Inc. v. Dept. of Homeland Security, 31 F.4th 1349, 1351 (Fed. Cir. 2022) (vacating administrative decision; commercial vendor's terms and conditions were incorporated by reference into GSA contract).

Drafters should pay attention to just what portion or portions of another document are being incorporated by reference. That issue made a difference in a 2015 Second Circuit decision, where:

… Addendum 5 [to the contract in question] refers only to a single specific provision in [another agreement] — the non-compete clause.

Where, as here, the parties to an agreement choose to cite in the operative contract only a specific portion of another agreement, we apply the well-established rule that a reference by the contracting parties to an extraneous writing for a particular purpose makes it part of their agreement only for the purpose specified. VRG Linhas Aereas S/A v. MatlinPatterson Global Opportunities Partners II L.P., No. 14-3906-cv (2d. Cir. July 1, 2015) (nonprecedential summary order affirming denial of petition to confirm arbitration award) (cleaned up, formatting modified).

In a 2014 Eighth Circuit decision:

– A buyer's purchase-order form referred to an external document with additional terms and conditions, and said the document would be provided on request.

– In a subsequent lawsuit, however, the seller denied having ever received the additional document.

That led to (what had to have been) an expensive court fight over whether an arbitration provision and an indemnification provision were part of the contract.

The case gives us a nice illustration of the Battle of the Forms; the Eighth Circuit ruled that the district court should have conducted a bench trial (no jury was demanded) to make findings of fact about just who had received what contract documents, and therefore just what terms were, or were not, part of the parties' contract under UCC § 2-207. Nebraska Machinery Co. v. Cargotec Solutions, LLC, 762 F.3d 737 (8th Cir. 2014).

Lesson: It's understandable that the buyer didn't want the hassle and expense of having to provide a hard copy of its additional terms and conditions form with every purchase order. Merely offering to provide a copy of the form, though, might well have been insufficient to bind the seller to its terms. The buyer could have put itself in a stronger position in court if it had posted the form on its Web site and then included a link to the form in its printed purchase order.

Failing to incorporate everything you want into a contract could result in losing rights your client thought it had. Example: In a 2024 Third Circuit decision:

–  Nationwide online used-car dealer Carvana tried unsuccessfully to compel arbitration of a class action brought by some of its buyers.

–  Carvana had included a separate arbitration agreement in the set of agreements signed by the buyers.

The district court court held, and the Third Circuit affirmed, that the arbitration agreement was unenforceable under Pennsylvania's Motor Vehicle Sales Finance Act ("MVSFA") because the buyer's installment-sale contract did not incorporate the arbitration agreement, as required by that statute:

Under Pennsylvania's MVSFA, a contract governing an installment sale must, inter alia: (1) be in writing; (2) contain all of the agreements between a buyer and an installment seller relating to the installment sale of the motor vehicle sold; and (3) be signed by the buyer and seller.

The statute creates a one-document rule for the installment purchases of vehicles requiring that all agreements between the parties must be incorporated into the RISC [Retail Installment Sale Contract]. …

Here, the arbitration agreements exist independently of the RISCs and are therefore unenforceable. Jennings v. Carvana, LLC, No. 22-2948, slip op. (3d Cir. Mar. 21, 2024) (nonprecedential; affirming denial of Carvana's motion to compel arbitration; cleaned up, emphasis and extra paragraphing added).

Carvana's brief had pointed out (at 3) that the district court refused to enforce the parties' arbitration agreement "because the RPA [Retail Purchase Agreement] incorporated the RISC and not the other way around." The district court took it as a given that an arbitration agreement could be incorporated by reference and did not have to be reproduced in the body of the RISC.

A California appeals court case considered a purchase order that a prime contractor had issued to a subcontractor:

–  The purchase order mentioned — but did not expressly incorporate by reference — a sales quotation that the subcontractor had previously sent to the prime contractor.

–  Further down in the purchase order, though, the P.O. language referred to "the contract documents described above or otherwise incorporated herein …." (Emphasis added.)

Applying the contra proferentem rule of contract interpretation (see 11.4), albeit without using that Latin phrase — and therefore construing the quoted term in favor of the subcontractor — the court held that the phrase, "described above or otherwise incorporated" had the effect of incorporating the subcontractor's sales quotation by reference into the prime contractor's purchase order. See Watson Bowman Acme Corp. v. RGW Construction, Inc., No. F070067, slip op. at 18, 21-22 (Cal. App. Aug. 9, 2016) (affirming, in pertinent part, judgment on jury verdict awarding damages to subcontractor). Oddly, that portion of the court's opinion was not certified for publication; the published version, which omits the discussion summarized above, is at 2 Cal. App. 5th 279, 206 Cal. Rptr. 3d 281, 283 n.*.

Example: In one case, the Seventh Circuit rejected an argument that incorporation by reference negated a contract's entire-agreement clause. Druckzentrum Harry Jung GmbH & Co. v. Motorola Mobility LLC, 774 F.3d 410, 416 (7th Cir. 2014) (affirming take-nothing summary judgment in favor of Motorola on Druckzentrum's claims for breach of contract and fraud).

An advantage: Drafting can sometimes be speeded up, and contracts shortened considerably, by incorporating external material by reference.

A classic example is the use of the INCOTERMS (International Commercial Terms), in purchase orders, to specify:

• how goods are to be delivered; and
• when title and the risk of loss will pass from the seller to the buyer.

(Concerning the INCOTERMS, see generally 13.6.)

A disadvantage: It might be tempting not to review material that is incorporated by reference into a document, even though the material will almost certainly have the same force and effect as though the material had been fully set forth in the body of the document itself.

Incorporation by reference can even turn an unenforceable contract into an enforceable one. Example: The Seventh Circuit held that a particular paragraph of a confidentiality agreement "was not enforceable by itself, but it could, as that paragraph expressly contemplated, combine with subsequent writings and/or conversations and/or conduct to become enforceable." R3 Composites Corp. v. G&S Sales Corp., 960 F.3d 935, 942 (7th Cir. 2020) (reversing and remanding summary judgment).

In 2024, Delaware's chancery court rejected a claim that a governance agreement among a corporation's shareholders — which was not available to the public — was validly incorporated by reference into the corporation's charter (i.e., the corporation's articles of incorporation, or in Texas, its certificate of formation). See Seavitt v. N-Able, Inc., 321 A.3d 516, 524 (Del. Ch. 2024) (granting partial summary judgment that certain provisions in a corporation's charter were facially invalid).

A court might give little or no weight to a declaration such as that this Protocol; precedent from the (U.S.) Supreme Court makes it clear that "there is no shorthand formula or magic phrase" for independent-contractor status. NLRB v. United Insurance Co., 390 U.S. 254, 258 (1968).

Example: A three-judge panel of the Ninth Circuit held that under California law, the plaintiffs in a class-action suit, who were drivers for FedEx, were employees, not independent contractors. A concurring opinion noted, somewhat acidly:

Abraham Lincoln reportedly asked, "If you call a dog's tail a leg, how many legs does a dog have?" His answer was, "Four. Calling a dog's tail a leg does not make it a leg." … FedEx was not entitled to "write around" the principles and mandates of California Labor Law …. Alexander v. FedEx Ground Package Sys., Inc., 765 F.3d at 998 (9th Cir. 2014) (Trott, J., concurring) (edited, citations omitted).

().  This Protocol tries to put a Band-Aid® on a common business situation that theoretically could be dangerous (although my limited research didn't indicate that actual trouble ever happened):

• When companies do business together, their people will often refer to each other as "partners."

• This is especially true in the sales world, where the term "channel partner" typically refers to a reseller, distributor, systems integrator, etc. that operates in "the [sales] channel."

  Why might it be dangerous for parties to refer to themselves as "partners"? Because in the U.S., an important feature of partnership, for example under Texas statute, is that "… all partners are jointly and severally liable for all obligations of the partnership …." This statement is fairly typical and is essentially a verbatim adoption of section 306(a) of the Revised Uniform Partnership Act (1997). See Tex. Bus. Org. Code § 152.304 (exceptions omitted).

  So what counts as a "partnership"? The term is typically defined, for example in a Texas statute, as follows:

… an association of two or more persons to carry on a business for profit as owners creates a partnership, regardless of whether:

1.  the persons intend to create a partnership; or

2.  the association is called a "partnership," "joint venture," or other name. Tex. Bus. Org. Code § 152.051(b) (emphasis added, exceptions omitted); see also § 152.052 (rules for determining if partnership is created). This definition is essentially a verbatim adoption of section 101(6) of the Revised Uniform Partnership Act (1997).

This means that when two parties refer to themselves as partners, they could be setting themselves up to be fully responsible for each other's debts and liabilities.

Here's a hypothetical example: Fred and Ginger decide to give dancing lessons; they rent space in a "strip mall" shopping center and remodel it to serve as a dance studio. They don't form a corporation or limited-liability company (LLC); in fact, they do no paperwork at all, other than each of them signing the lease for the studio space. Fred and Ginger sometimes refer to each other as "my partner."

But then one Sunday afternoon, when the dance studio is closed, Fred gets in his car to run a few errands — and those errands include picking up supplies for the studio. Fred runs a red light, hitting and severely injuring a pedestrian in the crosswalk.

The pedestrian likely will sue not just Fred, but also Ginger — and on the hypothetical facts here, it's not impossible that Ginger could be personally liable for the full amount of the pedestrian's medical expenses, lost wages, and pain and suffering, even though Fred was the one who ran the red light.

Disgruntled contracting parties can toss around fiduciary-duty claims. Example: In the D.C. Circuit's 2025 Goodrich case, after the stock market dropped in the early days of the COVID-19 pandemic, an investor ordered his wealth adviser to liquidate his entire portfolio — and then, after losing millions of dollars, he sued the adviser, claiming that the adviser had breached his fiduciary duty by failing to "explain every potential downside or loss that [the investor] ultimately experienced." The court affirmed the trial court's dismissal of the investor's claims; relevant here, the parties agreed that yes, the wealth adviser was a fiduciary, but the parties' investment agreement had limited the adviser's obligations. See Goodrich v. Bank of America N.A., 136 F.4th 347, 352 (D.C. Cir. 2025) (affirming dismissal).

So, § 3.8.1 is a guardrail term: You might not want to deal with a counterparty that might someday claim that you were the counterparty's "agent" or "fiduciary" and therefore legally obligated to give the counterparty's interests priority above the first party's own interests. Example: Such a claim occurred, for example, in a case in which New York's highest court rejected a claim of breach of fiduciary duty. See Pappas v. Tzolis, 20 N.Y.3d 228, 233-34 (2012).

Example: Delaware's chancery court rejected investors' fiduciary-duty claims when the contract in question had disavowed such duties:

The LLC Agreement also included broad waivers of the WP Investors’ fiduciary duties in four provisions. It stated that the WP Investors and their affiliates owed no fiduciary or other duties to the Company or its members beyond the duty to comply with the LLC Agreement. It further provided that each WP investor was permitted to "act exclusively in . . . its own interest and without regard to the interest of any other person," so long as it complied with the LLC Agreement. Khan v. Warburg Pincus, LLC, No. 2024-0523, slip op. at 4-5, text acc. nn.16-18 (Del. Ch. Apr. 30, 2025), aff'd w/o opinion, No. 236, 2025. (Del. Dec. 9, 2025). The chancery court also rejected the plaintiff's attempt to get around the fiduciary-duty waiver: "Because the limited liability agreement leaves no room for a quasi-fiduciary theory disguised as an implied covenant claim, this case is dismissed." Id., slip op. at 2.

Example: Similarly, in a Texas Business Court case, a minority member of an LLC brought a claim for breach of fiduciary duty against the LLC's majority member and sole manager, who had expelled the minority member. But the LLC's operating agreement (known in Texas as a "company agreement") stated that "no special relationship shall exist between any Manager and the Members, and no Member or Manager shall have any duty to any Member, whether fiduciary or otherwise, except as expressly set forth herein (or in other written agreements)." The court quickly disposed of the fiduciary-duty claim as precluded by the contract provision:

Under Texas law, courts must honor the contractual terms that parties use to define the scope of their obligations and agreements, including those that restrict fiduciary duties that might otherwise exist. This is especially true when the contractual limitation arises from an arms-length business transaction between sophisticated businesspeople. This principle adheres to Texas’s longstanding public policy of freedom of contract. Tall v. Vanderhoef, 2025 Tex. Bus. 15 ¶¶ 26-27 (granting, in part, defendant's motion to dismiss; cleaned up).

Caution: A court might disregard a proclamation that "they're not our agents!" if the facts show otherwise. As with independent-contractor status, merely saying "oh, no, there's no agency relationship here" won't make it so if the parties conduct themselves otherwise. Example: This was illustrated in DISH Network (2020), a Seventh Circuit case:

• The trial court concluded that DISH Network and its agents had violated telemarketing statutes and regulations (some 65 million violations, apparently). The court imposed a penalty on DISH of $280 million (!).

• In (mostly) affirming the judgment, the appeals court noted that "[t]he contract [between DISH and its representatives] asserts that it does not create an agency relation, but parties cannot by ukase negate agency if the relation the contract creates is substantively one of agency." United States v. DISH Network LLC, 954 F.3d 970, 975 (7th Cir. 2020) (citation omitted, emphasis edited).

  Caution: Even with a disclaimer like this, a court could find that a "fiduciary" relationship had arisen from the partiular facts, for example if one party "exercises excessive control" over another. This was illustrated in a case in which a federal district court denied lender-defendants' motions for summary judgment: The court said that "[i]f a lender exercises excessive control over a borrower, … a lender can assume the role of a fiduciary rather than a mere creditor" and that "the evidentiary record … cumulatively serve[s] to demonstrate, at the very least, a triable question of Wallis Bank assuming the role of fiduciary rather than mere creditor through myriad actions that demonstrate excessive control." Beaumont Lamar Apartments, LLC v. Wallis Bank, No. 4:23-cv-00341-O, slip op. at part III.B.2 (N.D. Tex. Feb. 6, 2024) (cleaned up, lightly edited).

By the way ("BTW"): Suppose that Alice and Bob enter into a contract. If Alice is found to be Bob's "agent," then (in general) Alice may deal with third parties, e.g., Carol, on Bob's behalf and make contractual commitments to Carol that are legally binding on Bob.

(For that reason, in Bob's contract with Alice, Bob might want to state specifically that Alice isn't her agent, as in § 3.8.3.3.)

And now let's suppose that Alice and Bob agreed that Alice would be Bob's agent, and in fact, Bob's exclusive agent: Even under those circumstances, at least under Texas law, Bob would still be free to make a deal with Carol without getting Alice involved and without paying Alice any kind of commission.

Example: In a 2022 Texas case:

• Two Houston lawyers wanted to change law firms; they engaged a recruiting firm, on an exclusive-agency basis, to find them new law-firm positions.
• But the lawyers joined a law firm on their own, as a result of personal contacts, without going through the recruiting firm.
• The recruiting firm sued the lawyers, seeking the commission that the recruiting firm would have earned if the lawyers had found another position through the recruiting firm instead of on their own.

The court rejected the recruiting firm's commission claim, citing Supreme Court of Texas authority about the distinction between an exclusive agency and an exclusive right to deal. See USPLC, LC v. Gaas, No. 01-20-00604-CV, slip op. at part C (Tex. App. Houston [1st Dist.] Aug. 30, 2022), citing Alba Tool & Supply Co. v. Indus. Contractors, Inc., 585 S.W.2d 662, 664 (Tex. 1979).

In January 2024, the U.S. Department of Labor announced the finalization of a revised rule to undo a Trump adminstration last-minute definition of independent-contractor status:

The new "independent contractor" rule restores the multifactor analysis used by courts for decades, ensuring that all relevant factors are analyzed to determine whether a worker is an employee or an independent contractor.

The rule addresses six factors that guide the analysis of a worker’s relationship with an employer, including any opportunity for profit or loss a worker might have; the financial stake and nature of any resources a worker has invested in the work; the degree of permanence of the work relationship; the degree of control an employer has over the person’s work; whether the work the person does is essential to the employer’s business; and a factor regarding the worker’s skill and initiative.

The rule separately rescinds the [Trump administration's] 2021 Independent Contractor Rule that the department believes is not consistent with the law and longstanding judicial precedent. See News Release (DOL.gov 2024) (formatting edited); see generally, e.g., MacDonald et al. (Littler.com 2024).

The Biden DOL's announcement was not greeted with universal acclaim; as one management-side law firm posted, the final rule "skew[s] the inquiry in favor of employee status. … While on the one hand this [six-factor test] may seem to lead to greater flexibility, it blurs lines, leads to inconsistent results, and provides businesses and workers little of the clarity that rulemaking on worker status was supposed to provide." McKinley & Winnick (Seyfarth.com 2024).

Unsurprisingly, in 2025 the second Trump administration changed things yet again, as summarized by another management-side law firm:

As expected with a change in the White House, and as very recently foretold in Department of Labor court filings, the Trump DOL announced via a Field Assistance Bulletin on May 1 that it will no longer enforce a 2024 Biden-era independent contractor rule under the Fair Labor Standards Act (FLSA).

While this announcement does not formally rescind the Biden-era rule, the DOL explained that it will be reconsidering the rule, and it is virtually certain that the DOL will dramatically change or replace the rule when its review is completed. Michael Gotzler, DOL Hits Pause on Enforcement of Biden-Era Independent Contractor Rule, Suggests New or Changed Rule Forthcoming (Littler.com).

In 2021, the then-new general counsel of the National Labor Relations Board, Jennifer Abruzzo, appointed by President Biden that she intended to revisit a number of employer-friendly decisions from the Trump-era Board about independent-contractor status, notably including SuperShuttle DFW, Inc., 367 NLRB No. 75 (2019).

Then in 2023, the Board issued its Atlanta Opera decision (372 NLRB No. 95), overruling SuperShuttle DFW and holding that "in the context of weighing all relevant, traditional common-law factors, including those identified in the Restatement, the Board will also consider whether the evidence tends to show that the putative independent contractor is, in fact, rendering services as part of an independent business." The Board's Atlanta Opera decision was summarized by MacDonald & Veslinovic (2023).

At this writing (January 2026), I can't find anything online to indicate that the Trump 2.0 NLRB has taken action to revisit this issue. That's likely due to the fact that the Board currently doesn't have a quorum: President Trump purported to fire Biden-appointed Board member Gwynne Wilcox (he also fired the Board's general counsel Abruzzo) just a week after he returned to the White House.

The [U.S.] Internal Revenue Service's Web site offers easy-to-read guidance about what the Service considers in determining whether someone is an employee — for whom the employer must pay certain taxes — or an independent contractor.

In 2019, the California legislature enacted a statute, known as AB 5, which added a new section 2750.3 (later repealed) to the California Labor Code, setting out a three-part initial test for whether someone is an independent contractor instead of an employee. The statute, however — and a subsequent amendment — goes on to set forth carve-outs for certain occupations that are worth a careful review. The statutory list of carve-outs from AB 5 was expanded in a subsequent bill, AB 2257; see, e.g., Gross & Rodine (2019); Kim et al. (2020).

Example: Gig-economy companies Uber, Lyft, and others didn't take California's AB 5 lying down: They funded Proposition 22, a ballot initiative classifying certain app-based drivers as independent contractors. That initiative passed with more than 58% of the vote.

Pro tip: Companies wanting to do business with freelance workers as "independent contractors" should check whether any state- or local laws might govern such dealings. Here's a ChatGPT link that might be helpful in your research.

California's Freelance Worker Protection Act gives certain "freelance workers" various protections by requiring written contracts, prompt payment, among other things. See Cal. Bus. & Prof. Code §§ 18100–18107.

Los Angeles has layered on its own ordinance, see Los Angeles Mun. Code Ord. No. 187782, including a model contract and a rules-and-procedures manual. (This might have been motivated in part by the extensive use of freelancers in the film- and music industries; see Scott (2023).)

Minneapolis implemented its own ordinance beginning in 2021, as noted by Kalk & Sandahl (2021).

New York City has its Freelance Isn't Free Act, Local Law 140 of 2016, which:

… establishes and enhances protections for freelance workers, specifically the right to:

• A written contract
• Timely and full payment
• Protection from retaliation

The law establishes penalties for violations of these rights, including statutory damages, double damages, injunctive relief, and attorney’s fees. Copied and pasted from this summary published by the NYC Department of Consumer and Worker Protection.

When two companies (A and B) enter into an LOI, they generally have one or more of the following things in mind:

1.  A and B want the LOI to serve as a convenient written discussion outline of a potential business arrangement as they're then currently contemplating it, and to set out agreed ground rules for their anticipated discussions about the potential arrangement.

2.  Sometimes LOIs arise from a personal business motivation: "Alice" and "Bob" — employees of A and B who're negotiating the deal — might feel pressure from their bosses to show that yes, yes, boss, we really are making progress, give us more time!

Let's use "Fred" and "Ginger" as names for hypothetical parties in listing a few examples of some the possible things that might concern Ginger:

1.  Ginger would want to know if a third party had the right to veto or otherwise control Fred's performance under the contract.

2.  Fred might not have told Ginger that the contract between Ginger and Fred would be a subcontract of a contract between Fred and a governmental entity — and that could result in Ginger unwittingly becoming, by law, bound by various "flowdown" obligations, discussed (briefly) at 3.6.3.

3.  Fred might not have told Ginger that he was currently the subject of a lawsuit by a third party that could prevent Fred from honoring his contractual obligations to Ginger.

4.  Fred might not have told Ginger that he was under an injunction (or judgment, or regulatory restriction) that could lead to trouble for Ginger.

5.  Fred might not have told Ginger that he (or perhaps some of his relevant employees) was:

• subject to debarment or other exclusion from dealing with the U.S. Government, for example for Medicare fraud or the like;
• barred under export-control laws, government sanctions, or the like.

5.  Fred might not have told Ginger that he had been doing business with a third party, "Harry," and that if Ginger and Fred entered into their contract, then Harry might sue Ginger for tortious interference. A tortious-interference lawsuit by a disgruntled party can have catastrophic results. Example: Oil giant Texaco (now part of Chevron) was hit with a damage award of some $10.5 billion, or more than $29 billion in 2025 dollars, for tortiously interfering with what the jury and the courts found to be a binding memorandum of understanding between Pennzoil (now part of Shell) and Getty Oil. See Texaco, Inc. v. Pennzoil Co., 729 S.W.2d 768 (Tex. App.—Houston [1st Dist.] 1986, writ. ref’d n.r.e.).

6.  Fred might not have told Ginger about facts indicating that Fred lacked the legal power to enter into their contract — meaning that if Fred were later to suffer buyer's remorse, he might later try to use his lack of legal power to void their contract.

7.  Fred might not have told Ginger that he knew he wasn't capable of carrying out his obligations under the contract. Example: In 2010, a court finding of similar conduct resulted in EDS, a giant U.S. computer-services company (later acquired by HP), settling a lawsuit with British Sky Broadcasting for some USD $460 million — more than four times the value of the contract between the parties. (See the discussion of this case at 20.34.6.7.) Regardless: As a practical matter, Ginger likely cares more about getting business done than with hypothetically being able to sue Fred someday. She might well prefer to know, early on, about Fred's incapability so she could consider looking elsewhere.

It's not a good idea to impose overly-rigid notice requirements; consider what the circumstances might be when notice is appropriate — for example, less formality might well be appropriate when a party is notifying another of a safety issue.

Example: In a Texas case (which had a noteworthy final result on appeal):

• A jury found that a contractor was given sufficient oral notice of serious safety violations, and that the customer had substantially (but not completely) complied with the contract's requirement that the customer give multiple written notices before being entitled to terminate the contract.
• Based on the jury verdict, the trial court awarded the customer some $4 million in damages and attorney fees; an intermediate appeals court affirmed that judgment.
• But the state supreme court reversed, holding that, because the contract specifically required three written notices, the contractor's actions were not enough. See, e.g., James Constr. Gp. v. Westlake Chem. Corp., 594 S.W.3d 722, 747-48 (Tex. App. Houston [14th Dist.] 2019) (evidence sustained jury verdict that contractor received sufficient notice of serious safety violations), rev'd, 650 S.W.3d 392, 396-97, 405-08 (Tex. 2022).

().  Caution: By law, some types of contract might require specific types of notice in particular situations and jurisdictions. Example: An Alaska statute requires notices from an insurer to be sent either by first-class mail with a certificate from the USPS, or by electronic mail with electronic confirmation of receipt by the intended recipient. See Alaska Stat. 21.36.260, cited in Travelers Property Casualty (Alaska 2025).

Caution: While an exchange of text messages can form a binding contract (see 28.3), parties should be judicious in sending notices by text messages, because text messages arguably have more potential to disappear than emails and FAXes. Tangentially, that's why California's Statute of Frauds requires written confirmation when texts and IMs are used to convey title to real property. See Cal. Civ. Code § 1624(d), discussed at 32.35.

For hard-copy notices, include the tracking number (certified mail, FedEx, etc.) on the notice itself. This can help forestall a claim by the addressee that the tracking number proved only that some document had been delivered and not necessarily the notice document.

The tracking number for the sample USPS "green card" below is near the bottom left of the card, just below the bar code.

Example: Just above the inside address of a letter, type: "Certified Mail No. [fill in], Return Receipt Requested" or "Via FedEx Waybill No. [fill in]."

See the following example (using a mocked-up letterhead) — note how the certified mail number is typed above the inside address:

Keep a photocopy of the notice (or other communication) with the tracking number on it; that can help forestall a later claim by the addressee that the tracking number proved only that some document had been delivered and not necessarily the notice document.

DCT comment: As a brand-new lawyer, I saw the following occur in a state-court hearing on a motion for summary judgment:

• The lawyer for the party opposing summary judgment claimed not to have received the 21-day advance notice of the motion hearing (required under state rules).
• The lawyer for the party seeking summary judgment — me, filling in at the hearing for a colleague at my firm — showed the judge a "green card" certified-mail receipt from the U.S. Postal Service.
• The opposing lawyer admitted to the judge that yes, the signature on the green card was that of his assistant — but the opposing lawyer insisted that the receipt must have been for some other communication because, he continued to insist, he had never received the 21-day notice of the hearing.
• There was no documentation connecting that particular green-card receipt to the notice of the hearing.
• The judge gave the benefit of the doubt to the opposing lawyer who claimed he never received the notice of the hearing.

(Several years later, the opposing lawyer was disbarred, for unrelated reasons.)

Some contract provisions require notice to be given no later than a specified time; a court might enforce such a requirement.

Example: A longtime Pizza Inn franchisee had an option to renew the franchise term. The contract set a deadline for the franchisee to give notice that he wanted to exercise the option. The franchisee was two months late in giving his renewal notice, and Pizza Inn decided not to renew. The court ruled in favor of Pizza Inn, holding that:

• Under Texas law, the holder of an option must strictly comply with the terms of the option, which in this case included the deadline for the franchisee to give his renewal notice; and
• In the particular circumstances, the franchisee's tardy renewal notice did not qualify for what the court described as a very-narrow "equitable intervention" exception to the law's general rule requiring strict compliance with option terms. See Pizza Inn, Inc. v. Clairday, 979 F.3d 1064 (5th Cir. 2020) (reversing district court and rendering judgment for Pizza Inn).

If a notice is shown to have been actually received, a court is likely to consider the notice to have been effective, even if the contractual notice requirements were not strictly followed; see, e.g., Elmen Holdings (5th Cir. 2023). See, e.g., Elmen Holdings, L.L.C. v. Martin Marietta Mat'ls, Inc., 86 F.4th 667, 679-80 (5th Cir. 2023) (affirming summary judgment in favor of plaintiff; citing Texas law) (email notice substantially complied with lease's requirement that notices must be either in person or by certified mail); Rose, LLC v. Treasure Island, LLC, 445 P.3d 860, 863-64 (Nev. App. 2019) (with extensive case citations).

But that won't always be the case. Example: In McGuire (N.Y. App. Div. 2021), the court held that an email notice had been ineffective because the contract in question required notices to be sent by first-class mail; see also James Constr. Gp. (Tex. 2022), discussed at 3.14.13.1 above. See McGuire v McGuire, 2021 N.Y. Slip Op. 04816, 197 A.D.3d 897, 900, 153 N.Y.S.3d 280 (N.Y. App. Div. 2021) (reversing partial summary judgment).

Suppose that two parties, "Alice" and "Bob," are entering into a contract, and that under the contract, Bob is supposed to notify Alice if a certain event occurs. If Alice thinks it's important for the notice to include particular types of detail, it might be well to have that spelled out in the notification requirement, instead of relying on a simple "in reasonable detail" phrasing.

Example: In a UK case, a buyer of shares in a company gave notice to the seller that the buyer was invoking an indemnification provision under the purchase agreement. The court of appeals reversed a trial-court holding that the buyer's notice had not provided "reasonable detail" as required by the agreement. The court noted that "courts should not interpret such clauses as imposing requirements which serve no real commercial purpose unless compelled to do so by the language of the clause." Drax Smart Generation Holdco Ltd v Scottish Power Retail Holdings Ltd, [2024] EWCA Civ 477.

Modern business continues to be based at least in part on trust: Many parties would be put off if they felt they had to re-read every word and punctuation mark in the final draft of a contract.

But even so: A second-signing party might want some specific assurance that the first-signing party hadn't surreptitiously altered the agreed version(s); this Protocol helps to guard against such fraud.

(For "significant" contracts, of course it might still make sense to re-read the to-be-signed copy anyway, one last time, or at least to spot-check it.)

Granted, once a final version of a signature document has been agreed to, the overwhelming majority of lawyers and clients would never be so underhanded as to try to sneak in surreptitious changes. Doing so could damage a lawyer's reputation and possibly even lead to disciplinary action — and the client's business relationship with the other party might well be poisoned by surreptitious changes to an agreed final version of a document.

It's sad, though, that some signing parties have indeed surreptitiously changed signature documents; a few cases in point are discussed at 3.15.3.2 below.

On occasion, a signer — or, more likely, an unscrupulous lawyer — will try to be sneaky:

Example: In Iowa, a husband and wife agreed to a mediated settlement of a divorce case. The wife's lawyer drafted an agreement and sent it to the husband's lawyer — who surreptitously added a provision giving his client certain additional child-custody rights — and it was the (surreptitiously) modified agreement that was signed. When this came to light, the husband's lawyer's license to practice law was suspended indefinitely (for that plus other offenses), with no possibility of reinstatement for at least two years. See Att'y Discipl. Bd. v. Leitner, 998 N.W.2d 627, 636, ¶ 28-45 (Iowa 2023), amended Feb. 19, 2024.

Example: A California appeals court scathingly reinstated a lawsuit in which the defendants were accused of surreptitiously substituting documents just before signature; the appeals court remarked that "these allegations state, quite literally, a textbook cause of action for fraud in the execution …." Munoz v. PL Hotel Group, LLC, 73 Cal. App. 5th 543, 547 (2022) (reversing dismissal), citing Rest.2d Contracts (1981) § 163, illus. 2, p. 444; subsequent proceeding sub nom. Munoz v. Patel, 81 Cal. App. 5th 761 (2022).

Example: A party surreptitiously altered a release before signature; the Sixth Circuit affirmed the trial court's judgment "reforming" the release, that is, revising the release after the fact. See Hand v. Dayton-Hudson, 775 F.2d 757 (6th Cir. 1985).

Example: I once served as an expert witness for a company in the summary-judgment phase of a noncompetition lawsuit. Omitting some details:

• A longtime executive at the company surreptitiously altered the HR department's draft of a modified employment agreement that he was being asked to sign.
• In the electronic document, the executive changed a two-year post-employment noncompetition covenant to a two-month covenant. He didn't flag that change — even though he did flag other changes in a different part of the 25-page document. (The executive's previous employment agreement had included a two-year noncompete.) The executive did this a second time with a revised draft with agreed changes (!).
• In due course, the executive resigned from the company. He took his wife on a two-month European vacation. Upon his return, he started working for a competitor of his former company.
• The company sued the executive for, among other things, breach of the noncompete clause in his employment agreement.
• The executive moved for summary judgment dismissing the company's claim, on grounds that his putative two-month noncompete had expired, and that the company should have re-read the agreement version that the executive signed before the company countersigned it.

The court denied the executive's summary-judgment motion. The case settled soon afterwards.

(Some "inside baseball" for litigators: For the company's summary judgment response, I provided a written expert witness affidavit about how things commonly work in the business world when parties negotiate contract wording. My affidavit focused on common business practice in contract negotiation, not the law. That's because courts generally don't allow lawyers to testify as expert witnesses at trial about the law, as instructing the jury about the law is the exclusive province of the judge.)

Example: One supplier apparently tried to sneak a material, unmarked change into a supposedly-final version of a contract — and ended up essentially killing its customer relationship. See Nada Alnajafi, Hidden Redlines: How to Avoid Them and How to Respond to Them (ContractNerds.com 2023).

Example: On a lighter note: An Australian landlord could have used a redlining representation in its lease form: As a prank, a prospective tenant, reviewing the lease in electronic form, added a requirement that the landlord must provide birthday cake on the weekend nearest the tenant's birthday. The landlord didn't notice the insertion. See Ricky Raad, Tenant's additional clause takes the cake (Mondaq.com 2016).

In a LinkedIn discussion kicked off by Laura Frederick, numerous lawyers told tales of why they always run a compare-documents operation against redlines from other lawyers, because they'd been burned by [jerk] lawyers who redlined just some of their revisions.

A court might not come to the rescue of a contracting party that was deceived by a surreptitious change in wording.

Example: A Russian court reportedly enforced a "contract" created by a man who changed a bank's credit-card agreement, then successfully sued the bank when it didn't comply with the altered terms. See Nick Shchetko, Russian Man Turns Tables on Bank, Changes Small Print in Credit Card Agreement, Then Sues, Minyanville.com (2013).

Example: Delaware's chancery court refused to declare that a $3.5 million payment obligation was unenforceable on grounds that, allegedly, the obligation had been "quietly" inserted into settlement agreement. See Cambridge North Point LLC v. Boston & Maine Corp., No. C.A. No. 3451-VCS, slip op. (Del. Ch. June 17, 2010).

This Protocol is worded as a confirmation, as opposed to a warranty, about signature-document integrity. That's intentional; here's why:

().  At the end of a fiscal quarter, a lot of contracts are likely to be in progress at once. (That's especially true in supplier-customer dealings.) Negotiators' time is a scarce resource; it has to be used economically.

Each party wants a reasonable amount of legal protection, of course. But as the shot clock runs down on the quarter, each party also wants to try to timely get ink on the signature lines.

Moreover, suppose that you're representing a supplier: The customer’s contract negotiator might not be a lawyer — and the last thing your sales people want is for the customer's negotiator to get nervous about the supplier's language take the path of least resistance, and simply put off signing the deal. A "confirmation" will likely comes across as softer than a warranty, and so might be less likely to trigger a visceral objection from the customer's people.

To be sure, as the equivalent of a representation, a confirmation would have different legal consequences than a warranty. But in many supplier-customer situations — particularly longer-term, high-dollar relationships such as major supply contracts and some software license agreements — the differences likely will be academic:

• High-dollar suppliers are keenly interested in preserving their customer relationships if at all possible — they generally don’t want to file a lawsuit against a customer except as a last resort.

• Customers like to have relationships with reliable suppliers.

  So, if either party were unintentionally to make a material change in the contract without marking it, the odds are high that the parties would try to work things out amicably.

In that situation, the mere existence of this representation clause would bestow a fair degree of moral- and bargaining leverage on the other party.

(It’s something that the other party's lawyer could go to his- or her counterpart with and ask, "can’t we do something about this?")

Whether the change in the contract was truly unintentional might well come down to witnesses' credibility. That would not be a comfortable situation for the party that had made the undisclosed change:

• If a jury were to conclude that the party had intentionally sneaked in a material unmarked change in the contract, that likely would be fraud — giving rise among other things to the possibility of punitive damages.
• That likely would give the innocent party even more bargaining power in negotiations to fix the contract wording.

Caution: If a party objects to including this Protocol in a contract, it might well be something of a "red flag," possibly indicating that the objecting party might not be a good business partner.

The objecting party might be saying, in effect: We don't mind having to re-read the entire document you signed before we sign it to make sure you're not trying to cheat us — and we think you should have to do the same, to be sure we're not trying to cheat you.

And at best, the other side doesn't mind wasting everyone's time and money on re-reading something that shouldn't have to be re-read. At worst, the other side really does think it's OK to slip in surreptitious changes.

This has happened to me only twice that I can recall: A pretty-junior associate in a law firm, representing a counterparty in a contract negotiation, objected to a similar clause. I contacted the associate's supervising partner, who'd also been working on the deal with us — and who quickly overruled the associate, saying, "Oh no, of course we'll agree to this."

(The other time this happened, a different BigLaw firm was representing The Other Side: A partner in the firm simply rejected the signature-integrity clause, without explanation. My client wanted to make the deal happen, so I double-checked the final signed version — because I didn't trust the other side — and explained the situation to my client.)

Suppose that (1) you're drafting a contract or other document, and (2) in some particular provision, you want to say that the other party (or even your own client) "waives" something. In that situation, it's a good idea to use bold-faced, all-capital letters for the word "WAIVES" (or waived, or waive, or waiver) — doing so can be "cheap insurance" to help persuade a judge, jury, or arbitrator, plus sometimes the applicable law might require waivers to be "conspicuous."

().  In any situation where you might later want to claim a nonwritten waiver by another party, seriously consider sending an email, to an appropriate person at the other party, prominently stating that the other party is indeed waiving the right or obligation. That way, if you later show that the person in fact received your email, and the other party didn't object within a reasonable time, then your email could:

• help discourage the other party from later denying the waiver, and

• if necessary, help you prove the waiver to a court or arbitration tribunal.

  In any such email, it's never a bad idea to try to put the ball in the other party's court to speak up, such as: Hey, [OTHER PARTY], in our call today, thanks for agreeing that I don't need to do [whatever] — if I misunderstood you, please let me know immediately.

  Caution: When sending a waiver-confirmation email like this, Don't ask the other party to "agree" that the other party waived something — that's because if the other party never responds to your email, then it'd be harder for you to prove the other party's oral waiver. #MuscleMemory

Here's a condensed version of this Protocol:

Or with (much) more detail, and still in single-paragraph format for easier copying and pasting:

Here are just a few examples of how audit rights either did pay off — or might have paid off.

•  As reported in the Wall Street Journal:

Publishing company Gannett Co. provided inaccurate information to advertisers for nine months, misrepresenting where billions of ads were placed, according to researchers who provided their findings exclusively to The Wall Street Journal. …

* * * 

In another example observed by a Wall Street Journal reporter, Capital One and American Red Cross bought ads that seemed as though they would appear on the Sarasota Herald-Tribune website, based on the information provided in the real-time auction. In fact, the ads ran on the website of Ruidoso News, a biweekly newspaper in New Mexico.

An American Red Cross spokeswoman said the organization was unaware of the issue.

Capital One didn’t respond to a request for comment.

(Extra paragraphing added.)

•  As reported in the New York Times: A woman was convicted of fraud for providing fake customer lists to JPMorgan Chase while selling her financial-aid startup company to the bank; she was sentenced to 85 months in federal prison. "Though the bank eventually pieced together the scheme after conducting its tests, its due diligence team failed to sniff out the fraud during the acquisition." Ron Lieber, Charlie Javice Sentenced to 85 Months in Prison for Fraud (NYTimes.com Sept. 29, 2025) (gift article).] Another observer noted: "JPMorgan enacted a third-party marketing company to verify [the startup company's] user data, but the third-party company primarily counted data fields instead of authenticating actual users." Abbie Staiger, Learning from JPMorgan's $175M Due Diligence Error (AFCE.com 2025).

And there was a knock-on effect: JPMorgan found itself being billed for some $60 million for the woman's legal fees — as the NY Times also reported: "JPMorgan said in a filing last month that Ms. Javice engaged five separate law firms, and that she and her lawyers have treated the original ruling forcing the bank to pay for her defense as a 'blank check to bill and expense whatever they please.' The stable of lawyers that she has used have also represented Elon Musk, Harvey Weinstein and Sam Bankman-Fried." Ron Lieber, She Took JPMorgan for $175 Million. That Doesn’t Include Her Restaurant Bills. (NYTimes.com Nov. 14, 2025) (gift article).] (Anticipating just this possibility, § 14.1.4 of {{{NAME Protocol 14.1 (Defense Against Claims Procedure Protocol) gives the defending party the right to control the defense.)

In a 2003 article, fraud examiner Craig Green lists a number of things that such folks often look for, including, for example:

• fictitious "shell entities" that submit faked invoices for payment;
• cheating on shipments of goods, e.g., by shorting goods or sending the wrong ones;
• cheating on service performance, e.g., by performing unnecessary services or by invoicing for services not performed;
• billing at higher-than-agreed prices;
• kickbacks and other forms of corruption;
• and others. See Craig L. Greene, Audit Those Vendors (ACFE.com 2003).

For another overview of issues generally addressed in audit clauses, see a 2020 FTI article that suggests, among other things:

• letting the auditor check completeness, "the right to verify that information excluded is correctly excluded, ie the completeness check"; and
• "[r]eporting processes and the customer’s right to comment on audit findings."

In some deals, a party's prospect of not getting paid can be a non-trivial risk:

Example: At the start of the COVID-19 lockdown in 2020, Walmart entered into a "Supply Agreement" — basically, a framework agreement or master purchase agreement — with a company called K7.

• Under the Supply Agreement, Walmart placed successive orders adding up to millions of bottles worth of hand sanitizer in bottles.
• At first, Walmart "collected" the orders from K7's warehouse, as called for in the Supply Agreement, and paid K7 for them.
• But as consumer demand tapered off, Walmart started failing both to pick up the orders — leaving K7's warehouse bulging with bottles — and also to pay K7 for them.

K7 sued Walmart for breach of contract. Walmart defended by claiming that the Supply Agreement didn't provide a quantity or price and so was unenforceable. The jury disagreed and awarded K7 more than $7 million; the Eighth Circuit affirmed judgment for that amount plus prejudgment interest and costs. See K7 Design Grp, Inc. v. Walmart, Inc., 143 F.4th 931 (8th Cir. Jul. 11, 2025) affirming No. 5:21-CV-5069 (W.D. Ark. Jul. 24, 2023) (entering judgment on jury verdict).

What seems to have sunk Walmart's case was that:

• The parties' email exchanges, with specifics about the quantity and pricing, appear to have clearly met the UCC requirements for enforceability, despite Walmart's seemingly "strained" arguments to the contrary.
• There was no dispute that the Walmart buyer who'd dealt with K7 (including those email exchanges) had the authority to place orders.
• The Supply Agreement didn't specify any particular form that an "Order" had to take to be binding.

Apparently Walmart wasn't the only retailer that refused to take delivery or pay for hand sanitizer that it ordered during the pandemic: K7 also sued the Kroger grocery chain and, separately, Five Below, Inc., a Philadelphia-based chain of speciality discount stores, alleging much the same thing as in its Walmart case. See K7 Design Grp., Inc. v. Five Below, Inc., 540 F. Supp. 3d 508 (E.D. Pa. 2021) (denying Five Below's motion to dismiss).

After a five-day trial, a jury found for Five Below on all counts. See id., No. 21-1406 (E.D. Pa. Jun. 21, 2023) (awarding costs to Five Below).

Example: During the economic downturn accompanying the COVID-19 pandemic, the prominent retail chain Paper Source:

• loaded up on inventory from its small-business suppliers, ordering unusually-large quantities of merchandise — as reported by the Washington Post, "Paper Source ordered more from The Card Bureau in a 60-day period than it had in all of 2020"; and
• then, in effect, tore up the bills by filing for bankruptcy protection — the legal effect of which was to allow Paper Source (mostly) to stiff its suppliers, likely paying them something like pennies on the dollar. See Jeremy Hill, Paper Source Bankruptcy Squeezes Small Greeting Card Sellers (WashingtonPost.com March 5, 2021). See also, e.g., Christine Haughney and Liz Brown-Kaiser, Paper Source vendors left pleading for payment as executives seek $1 million in bonuses (NBCNews.com Apr. 13, 2021).

Later, Paper Source was purchased by the owner of the Barnes & Noble bookstore chain, an activist investment management fund, Elliott Investment Management. See Nadine El-Bawab, Barnes & Noble owner buys stationery retailer Paper Source out of bankruptcy (CNBC.com May 11, 2021).

Additional reading: Alicia Tuovila, Bankruptcy Explained: Types and How It Works (Investopedia.com 2022).

Example: A target company's assets were acquired by a newly-created subsidiary of the party that the target company had anticipated would be the buyer.

• That newly-created subsidiary turned out to be judgment-proof, so the target company didn't get all the payments it bargained for.
• Worse: The acquisition agreement evidently didn't provide any kind of backup payment source (see 4.4), such as a guaranty (see 4.8) of the subsidiary's payment obligations.

So, the target company lost. Northbound Group, Inc. v. Norvax, Inc., 795 F.3d 647, 650 (7th Cir. 2015) (cleaned up), affirming 5 F. Supp. 3d 956, 972-74 (N.D. Ill. 2013).

(This case also illustrates the importance of making sure the contract names the correct party or parties, as discussed at 20.1.7.2.)

Example: Over the years, various enterprises associated with Donald Trump have reportedly "stiffed" a large number of creditors. See, e.g., Igor Derysh, “Trump never pays his bills”: Truth Social reportedly stiffs contractor amid financial “disarray” (Salon.com Aug. 26, 2022); Charlie Gasparino and Eleanor Terrett, Trump's social media app facing financial fallout (FoxBusiness.com Aug. 25, 2022); Alexandra Berzon, Donald Trump’s Business Plan Left a Trail of Unpaid Bills (WSJ.com Jun. 9, 2016).

Here's a common use for backup-payment arrangements:

• A landowner enters into a "prime contract" with a general contractor (or "prime") to get a building built.
• The prime contract contemplates that the general contractor will hire, coordinate, and pay, various specialist subcontractors ("subs") to do various specific things such as demolish the existing building ("demo work"); pour a foundation for the new building; erect the building's frame and roof; install electrical wiring; install plumbing; and so on.

[DCT TO DO: Diagram showing payments by customer to contractor to subcontractor?]

The general contractor's obligation to pay its subs is important to the owner: If the general contractor were to fail to pay a sub, the law would likely allow the sub:

• to demand payment from the owner — which likely has already paid the general contractor — and/or
• to place a lien on the owner's property, thus placing a "cloud" on the owner's title and complicating the owner's life. See generally Mechanic's lien (Wikipedia.org); Mechanic's Lien Definition (Investopedia.com).

For that reason, in negotiating the prime contract with the general contractor, the owner might well require the general contractor to obtain "payment security" to make sure that the subs got paid.

(The prime contract likely would also require the owner to obtain financing from a bank or other lender, so that the general contractor would have assurance that it would be paid.)

One easy alternative to engaging a Bank would be for the Payer to provide the Biller with a deposit (concerning which, see Protocol 4.5).

Bankruptcy law is a major reason that the Biller might want the Payer to keep backup-payment arrangements in place: Without such arrangements, if the Payer were to file for bankruptcy protection, then under U.S. law:

• the Biller might end up recovering no more than pennies on the dollar in the bankruptcy proceedings; and
• the Biller might be forced to refund, as a "preference" (see 31.2.3), some or all of any payment made by the Payer.

Consequently, the Biller would very much like to be able to demand payment from a backup payment source such as a bank, whose financial resources would thus serve as an alternative "pot of money" from which the Biller could reimbursement of any preference refund.

(For more on personal guaranties of commercial leases in the bankruptcy context, see generally Gordon, Spero, and Vath (2024).)

().  When a bank or other financial institution agrees to serve as a backup payer, it's highly unlikely to do so for free, unless the arrangement is folded into some other credit arrangement that Payer already has with the bank — and if the Payer must pay for a backup-payment arrangement (as in Option A), then the Payer will likely consider that expense in determining, for example, whether to accept a particular supplier's bid for an order or project.

On the other hand, if the Biller, e.g., a supplier, must pay for a backup-payment arrangement (as in Opion B), then that expense will factor into Biller's pricing position.

In Option A, subdivision 2 is intended as a guardrail, to block an unscrupulous Payer from rolling the dice and asking the Biller for reimbursement anyway, on a theory of, let's give it a shot, the worst that can happen is they say "no." That's not the behavior of a reliable business partner (and it also creates what's known as "moral hazard").

Here's a tangential point to consider: When the Bank prices its fee for serving as a backup payer (a.k.a. a "surety"), the Bank will consider its own potential risk exposure: "[I]nsurers cannot seek reimbursement from their insureds for amounts paid out under the policy, whereas sureties can require reimbursement from the obligor (contractor) for any losses incurred by the surety under the bond." Colm Nelson, Ways to Guard Against Insolvency Risks (JDSupra.com 2022).

Advance agreement about "borderline" expenses can help to avoid later disputes.

But: Drafters for Billers should watch out for mandatory language such as that in a clause I once reviewed, in a customer's purchase-order fine print:

–  The clause in question required any supplier seeking reimbursement to "flag" any even-arguably borderline expenses.

–  Presumably, that requirement was to help avoid unpleasant surprises in reimbursement requests.

–  But a party incurring expenses probably wouldn't want to agree to a mandatory expense-flagging requirement — because a stingy reimbursing party could try to use a supposed flagging failure as an excuse to withhold reimbursement.

If a Payer wanted to insist on preapproval rights, it could ask for language such as the following:

Note that under the above language, a Biller would not be breaching the Con­tract if it didn't get preapproval: Instead, the Biller simply might not get paid — which likely would be plenty of motivation for the Biller to get preapproval.

Suppose that a Biller submits a request for reimbursement that doesn't comply with this Protocol, and Payer's accounts-payable people process the request and pay the reimbursement. In that situation, Payer should be able to recover the payment, or to take an "offset" against the next payment due, without having Biller object that Payer supposedly waived the noncompliance.

A Payer drafter could use language along the following lines to be explicit about this:

In at least some jurisdictions, courts interpret guaranties strictly against the creditor — often relying on the contra proferentem rule on the premise that the creditor drafted the guaranty language. See Extech Building Materials, Inc. v. E&N Construction, Inc., No. A-28-24, slip op. at 10, 12 (N.J. Dec. 2, 2025).

In drafting a contract that includes a guaranty obligation, the safest approach might be to include a separate signature line for the guaranty: A given jurisdiction might not have a bright-line requirement on that score, but it's still best to leave no room for doubt that a signer is undertaking the obligations of a guarantor. See Extech Building Materials, Inc. v. E&N Construction, Inc., No. A-28-24, slip op. at 15, 17 (N.J. Dec. 2, 2025) (reversing appeals court and reinstating summary judgment in favor of purported guarantor — declining to adopt a bright-line approach but suggesting a separate signature line).

A purported guaranty document should make it clear to a signer that the signer is undertaking the obligations of a guarantor. That didn't happen in Extech (N.J. 2025): A construction company's president signed a supplier's credit application that had one signature line. The signature line included the pre-printed phrase "(No Title)." New Jersey's supreme court held that this didn't make it clear to signers that they were personally guaranteeing payment to the supplier. See Extech Building Materials, Inc. v. E&N Construction, Inc., No. A-28-24, slip op. (N.J. Dec. 2, 2025)

A guaranty should be clear about just whose obligations are being guaranteed, because a creditor's aggressive position on this issue — possibly for an unrelated debt — could lead to litigation. See McLane Foodservice, Inc. v. Table Rock Restaurants, LLC, 736 F.3d 375 (5th Cir. 2013) (affirming judgment in favor of guarantor; guaranty did not extend to the debt in question).

A standard-form contract might include guaranty language that the parties might not have specifically discussed but that could be enforceable against an individual who signs on behalf of a corporation or LLC. Example: This happened in a Florida case where:

• A corporation, 688 Skate Park, was the tenant in a lease.
• The signature block correctly listed 688 Skate Park as the party agreeing to the lease.
• The lease was signed on behalf of 688 Skate Park by one Jay Turner "as its President."
• Unfortunately for Mr. Turner, though, the lease form also included a statement that "the individual executing this Lease on behalf of said corporation, limited liability company or limited partnership, guarantees the obligations of Tenant hereunder."

The result: A Florida appellate court held that Mr. Turner could be personally liable on the lease. See Coleman v. 688 Skate Park, Inc., 40 So.3d 867 (Fla. App. 2010) (reversing district court's dismissal of landlord's suit against guarantor; emphasis added).

Example: Similarly, in a Mississippi supreme court case, a company president signed a commercial lease in his representative capacity — but the lease also contained language stating that the company personally and unconditionally guaranteed the company's financial obligations. This, said the supreme court (citing cases), had the effect of binding the company president to the lease's arbitration clause. See R.K. Metals, LLC v. E & E Co., No. 023-CA-00620-SCT, slip op. (Miss. Mar. 6, 2025) (affirming summary judgment).

See generally the following:

–  Stephen L. Sepinuck, Suggestions for Drafting Guaranties, archived at https://perma.cc/QVY7-YNPH (discussing various waivers of defenses).

–  Joshua Stein and Elaine Wang, Revisiting The 24 Defenses Of The Guarantor — 24 Years Later, archived at https://perma.cc/DQ8H-NL3Q.

–  Christine Anchia Crousillat and Herman Lipkis, Types of Guarantees in Commercial Leases.

To speed up negotiation, a drafter representing a Biller might not want to bother including an interest provision in the Con­tract, because:

• Even without a contract provision, the law might allow the charging of interest on past-due amounts. For example, section 302.002 of the Texas Finance Code states in part: "If a creditor has not agreed with an obligor to charge the obligor any interest, the creditor may charge and receive from the obligor legal interest at the rate of six percent a year on the principal amount of the credit extended beginning on the 30th day after the date on which the amount is due. …"
• Some customers have been known to announce, imperiously: We don't pay interest, period, and if you want our business, that's the way it is. And so even bringing up the subject of interest might "poke the bear" (see 8.14), i.e., cause the Payer to insist that the Con­tract instead prohibit the Biller from charging interest — and such a prohibition would likely override the law's allowance of interest charges.

So: For a Biller, this could be one of those times when silence (about interest charges) might be the better choice during negotiation of the Con­tract.

Many (and even most) payers will require someone knowledgeable to approve payment of each invoice. But in a trusted business relationship, you shouldn't even be sending an invoice in the first place unless you have reason to think that in fact you're entitled to payment.

Repeated invoice problems shouldn't necessarily give rise to the payer accusing you of breach of contract or misrepresentation — but it could happen ….

If the Con­tract specifies that the Payer must use one or more particular payment methods (or that the Biller would prefer a particular method), then it'd be a good practice for each invoice to include a suitable reminder of that fact.

Here's a set of Honeywell invoicing requirements — extra paragraphing has been added to break up the "spaghetti paragraph" (see 2.5).

13.  Invoicing and Payment

After each shipment made or service provided, Supplier will submit an invoice listing a description of the Goods provided and, as applicable, part numbers, quantity, unit of measure, hours, and the unit and total prices.

This invoice must match the corresponding Purchase Order pricing, quantities, and terms,

and must be sent to the invoice address listed on the Purchase Order.

All applicable taxes and other Government charges including, but not limited to, sales, use, or excise taxes; value added tax, customs duties, fees and all incidental charges including but not limited to royalties, selling commissions, nonrecurring engineering, or other incidental charges must be separately itemized and identified on the invoice.

The invoice must also include the following information in English, or in the destination country’s official language if required:

(a) name and address of Supplier and the Honeywell entity purchasing the Goods;

(b) name of shipper (if different from Supplier);

(c) Honeywell’s Purchase Order number(s);

(d) country of export;

(e) detailed description of the Goods;

(f) Harmonized Tariff Schedule number;

(g) country of origin (manufacture) of the Goods, or if multiple countries of origin, the country of origin of each part shipped;

(h) weights of the Goods shipped;

(i) currency in which the sale was made;

(j) payment terms;

(k) shipment terms used; and

(l) all rebates or discounts.

The invoice will be accompanied (if applicable) by a signed bill of lading or express receipt evidencing shipment.

Payment of an invoice does not constitute acceptance of the Goods

and is subject to appropriate adjustment should Supplier fail to meet the requirements of the Purchase Order.

Payment terms are net 120 days from receipt of a Honeywell-approved invoice unless otherwise stated on the face of the Purchase Order or other written agreement executed by both parties.

Invoices will not be approved unless they accurately reference conforming Goods received by Honeywell or services satisfactorily performed for Honeywell.

Payment will be scheduled for the first payment cycle following the net terms for the Purchase Order.

Here's a set of Walmart invoicing requirements:

Invoices submitted to Walmart must have the following information:

• Supplier Name / Address (as registered with Walmart)
• Walmart Supplier Number (as provided on your Welcome email)
• Invoice Number (must be unique, numeric and a maximum of 15 characters)
• Invoice Date
• Invoice amount
• Invoice amount
• PO being invoiced (one per Invoice / Credit Memo) – Invoices without a PO number will be rejected
• Invoice amount
• Walmart Business Contact (Your main point of contact for day-to-day work)
• Invoice amount
• Walmart Department Name
• Detail of service / goods provided
• Remittance Information
• Contract Number

In some jurisdictions, a pay-if-paid clause could mean that the Sub cannot seek payment from a backup payer, or "surety," such as a payment bond, if there is one. See BMD Contractors, Inc. v. Fid. & Dep. Co., 679 F.3d 643, 649 (7th Cir. 2012) (affirming summary judgment in favor of issuer of payment bond). See generally, e.g., Robert Cox, Pay-if-Paid Clauses: A Surety's Defense for Payment Bond Claims? (JDSupra.com 2019).

If the Sub is going to agree to pay-if-paid terms with the Prime, then the Sub should consider asking the Prime to commit to maintaining "payment security" (see Protocol 4.4) for all amounts to be paid by the Prime — including, without limitation, amounts to be paid under any (accepted) purchase orders issued by the Prime under the Con­tract. (This represents what might be one of the most common "use cases" for payment security.)

The Sub might want the payment security to take the form of:

• an irrevocable, unconditional letter of credit (see the notes at 4.19), or
• a bank guarantee (see Protocol 4.8), or
• a payment bond,

in any of these cases, on terms that are reasonably acceptable to (and perhaps approved in advance by) the Sub.

Here's a partial list, based solely on what I happen to have encountered in my reading — be sure to check the law in your particular jurisdiction of interest.

Various states restrict or prohibit pay-if-paid clauses, e.g., California, Illinois, Massachusetts, North Carolina, South Carolina, Virginia, and Wisconsin. See Dismas Locaria and Caleb McCallum, Even Federal Contractors and Subcontractors Should Pay Heed to State Law on Conditional Payment Clauses (JDSupra.com 2022).

Nevada's supreme court has noted that "pay-if-paid provisions, while not void per se, are unenforceable if they run contrary to the rights and requirements established under NRS 624.624-.630" (state-law statutory provisions governing payment of subcontractors, etc.) and thus are to be examined on a case-by-case basis. See Helix Elec. of Nevada, LLC v. APCO Constr., Inc., 138 Nev. Adv. Op. 13, 506 P.3d 1046, 1048 (Nev. 2022) (affirming district court; pay-if-paid provision was unenforceable).

New York appears to entirely ban pay-if-paid clauses. See West-Fair Elect. Contractors v. Aetna Cas. & Surety Co., 87 N.Y.2d 148, 158, 661 N.E.2d 967 638 N.Y.S.2d 394 (1995) (on certification from Second Circuit).

Ohio, on the other hand, has the opposite rule, allowing even pay-if-paid provisions. See Transtar Electric, Inc. v. A.E.M. Electric Serv. Corp., 2014 Ohio 3095, 140 Ohio St. 3d 193. The state supreme court's decision has been criticized for not addressing public-policy considerations. See Scott Wolfe, Jr., Ohio Supreme Court Gets Pay If Paid Decision Wrong, Hurts Subcontractors (ZLien.com 2014).

Texas, by statute, has regulated "contingent payment" clauses for certain construction subcontracts; such clauses are unenforceable if "unconscionable," with the statute also providing a safe harbor for contingent payers . See Tex. Bus. & Comm. Code § 56.001 et seq., especially § 56.054(b) (safe-harbor definition); see Solorzano v. Sage Comm'l Grp. LLC, 693 S.W.3d 689, 694–96 (Tex. App.—Houston [14th Dist.] 2024, pet. denied) (contingent-payment clause was unconscionable but payee had signed release of payer).

Virginia's SB-550 bans pay-if-paid and pay-when-paid provisions in certain construction subcontracts, as well as imposing seven- or 45-day payment deadlines in many cases. See generally James Harvey, Virginia’s New Construction Payment Terms (Part 1) and (Part 2) (JDSupra.com 2022).

A Biller might want to restrict Payer payments for fear of theft. Example: A sales agent in Mexico, employed by a New York-based exporter, accepted cash payments from a exporter customer in Mexico but failed to forward hundreds of thousands of dollars of those payments. See Vista Food Exchange, Inc. v. Comercial de Alimentos Sanchez, 147 F.4th 73 (2d Cir. Jul. 24, 2025) (reversing and remanding, in part, summary judgment dismissing exporter's breach-of-contract case against customer).

For payments by check, the Con­tract could require the check to be drawn on, for example:

• a U.S. bank; or
• a specifically-identified bank; or
• any bank to which the Biller doesn't reasonably object in writing.

When an ordinary check is written, the money stays in the Payer's account until the check is "presented" to the Payer's bank for payment. This means that the check might not clear if the Payer were to file for bankruptcy protection — because the bank is likely to freeze the Payer's account. See generally Check (Investopedia.com).

(These days, check clearance is almost always done electronically if the Biller uses a different bank than the Payer.)

Payment by automated clearing house ("ACH") is an electronic debit transaction in lieu of a check. See generally Automated Clearing House (ACH) (Investopedia.com); for international transactions, see SWIFT (Stripe.com).

Caution: As with payment by check (4.13.8.3), if the Payer files for U.S. bankruptcy protection before the check clears, then the check might never clear.

Caution: It's a bad idea to include, in the Con­tract itself, Biller's bank-account information for ACH transaction:

• The Con­tract might someday be disclosed to others, such as in a due-diligence effort.
• The Con­tract might someday become publicly available — such as the Payer's having to file the contract with the SEC as a "material agreement" but failing to ask for confidential treatment of the bank-account information.
• It's not unknown for one party to expose another party's confidential information to the public by filing the information with the SEC.⁷ (See Option § 5.3.33.4 to Protocol 5.3 concerning confidential information, which addresses the possibility of such disclosures.)

In such a situation, the Biller's bank-account information could end up available to an unknown number of others.

A better way to do this is to say, in the Con­tract, that the Biller will separately provide wire-transfer information. (This should be done by secure means.)

A certified check is written by the Payer and drawn on the Payer's bank account, but the bank guarantees to the Biller that the bank has put a hold on Payer's account for the amount of the check. This means that the check shouldn't bounce if it can legally be paid. See Certified check (Investopedia.com).

Caution: With a certified check, the money stays in the Payer's account until the check clears; this means that the same bankruptcy issues exist as for regular checks (4.13.8.3).

Caution: Certified checks can be counterfeited, in which case the bank might not have to pay, and if the Biller cashes the check, the Biller might have to refund the money (that's probably in the bank's standard customer agreement that the Biller had to sign to open an account with the bank).

A cashier's check is written by the bank itself using funds in the Bank's own account, not the Payer's account: When writing that check, the bank transfers the stated amount of money from the Payer's account to the bank's own account. See Cashier's check (Investopedia.com).

(Note the difference between this and a certified check, discussed above.)

The Con­tract might specify what bank, or what type of bank, is to be used for a cashier's check.

Caution: Cashier's checks can be counterfeited, meaning that the Biller might be on the hook to refund the payment, as noted above.

Payment by wire transfer would give the Biller "immediately-available funds" that the Biller could immediately withdraw and spend if desired. See generally Wire transfer and Available funds (each at Investopedia.com); for international transactions, see also SWIFT (at Stripe.com).

Caution: As with ACH payments (see 4.13.8.4), don't include bank-account information in the contract itself.

In this Protocol, § 4.12 doesn't set a fixed deadline for a Payer to challenge a Biller invoice. But the Payer shouldn't string the Biller along with unspecified grumbling about the invoice while withholding payment.

Example: In a Delaware case, the trial court held that a customer was liable for certain unpaid vendor invoices because the customer had complained about invoices, but the customer had not challenged the invoices within the time prescribed by the contract. The court observed: "Voicing displeasure and asking for accountability is not the same as challenging [the vendor's] right to payment." The court continued: "Trimble's right to directly challenge the invoiced amounts sunsetted pursuant to the [contract's] plain terms." Outbox Sys., Inc. v. Trimble, Inc., No. N21C-11-123, slip op. at part IV.A.1 (Del. Super. Ct. Apr. 30, 2024) (decision after trial).

Moreover, § 4.12's requirement of a timely explanation, in subdivision B, is just good-neighbor behavior: The Payer might be tempted not to say anything until the Biller asks, "hey, where's our money?" and/or to withhold all payment, in either case, as a cynical way of increasing the Payer's leverage and extending the payment terms. That kind of nickel-and-diming behavior, though, shouldn't happen in a trustworthy- and cooperative business relationship.

It's pretty well established that when the Payer makes a payment under the Con­tract, that in itself doesn't limit any rights that the Payer might have concerning the subject of the payment — such as, for example, warranty rights against the Biller.

Example: Suppose that the Payer hasn't yet paid the Biller's invoice, and that the Payer and the Biller are having a dispute about something relating to the invoice, perhaps about the quality of the Biller's deliveries. The Payer could fear that paying the invoice might be interpreted as acceding to the Biller's position or otherwise prejudicing the Payer's rights. But that shouldn't be the case unless the Payer had clearly agreed otherwise.

In some jurisdictions, if someone pays an incorrect invoice without protest, it might not be possible to recover the overpayment. See James D. Abrams and Erica L. Cook, Voluntary Payment Doctrine: A Useful Affirmative Defense or Instrument of Evil? (AmericanBar.org.2016), archived at https://perma.cc/5HY2-9YD2/.

Payment disputes are a quintessential example of how last-offer arbitration (a.k.a. "final offer" or "pendulum") can be used to promote settlement, as discussed at Protocol 21.11.

From the other side of the coin: Question: What if you're a supplier and a customer sends you a partial payment that's marked "Payment in Full"? Answer: If you cash the check, you might very well be stuck — possibly losing out on a very-large amount due. See, e.g., Scott Wolfe, Jr., Are Checks with “Payment in Full” in Memo Line Legally Binding? … (Levelset.com 2019 & 2021); Sara Lipowitz, 'Paid in Full' Check Memo (Lawyers.com 2020).

Example: The insurance carrier United HealthCare of Texas found itself stuck with a $24,000 settlement of United's $2 million overpayment claim against a physicians' group:

• United asserted that the physicians' group had been overpaid by some $2 million.
• As a settlement offer, the physicians' group sent — to United's lockbox contractor, Wells Fargo — a check for $24,000, marked "Full and final payment" of the dispute. The physicians' group also sent copies of the settlement proposal to multiple United addressees, including United's in-house counsel.
• As United's lockbox contractor, Wells Fargo automatically cashed the settlement check.

A Texas court held that United had ample notice that:

• the check was part of a settlement proposal, and
• had United exercised due diligence, it would have had ample time to stop its lockbox contractor, Wells Fargo, from cashing the check.

Therefore, said the court, United was bound by the settlement offer — and thus recovered only $24,000 of what United claimed had been United's $2 million overpayment to the physicians' group. See United Healthcare of Texas, Inc. v. Low-T Physicians Service, P.L.L.C., 660 S.W.3d 545 (Tex. App–2023) (affirming declaratory judgment).

It'd be fairly typical for the Biller to apply payments under a contract to the Payer's then-unpaid payment obligations — in the order of date incurred — as follows:

– First: The money paid would be used to pay off any accrued but unpaid interest;

– Then: Any money left over would be applied to reduce the unpaid principal balance. See generally David Cook, The Interest Tail Wags the Profit Dog, Business Law News, Issue No. 3, 2014 (State Bar of California Business Law Section; available on-line to Section members).

Order-of-payment language is often seen in promissory notes and other loan documents, and sometimes in contract language allowing interest to be charged for past-due payments (concerning which, see 4.9).

See Protocol 4.2 and its commentary concerning demands for payment "up front" even if the Con­tract provides other payment terms.

In theory, being an IP infringer, due to late payment, could have serious financial consequences:

• Suppose that a customer were late in paying the price of a patented- or copyrighted product purchased from a vendor.
• The vendor could try to claim that the customer's unpaid use of the product constituted infringement of the vendor's intellectual-property rights — and that the customer therefore owed the vendor a portion of the customer's profits as indirect damages for the infringement, not merely as damages for breach of contract.

I'm not aware of any cases specifically on point. But some well-known companies have been hit with such profits-as-indirect-damages awards for analogous conduct, including for example the air-conditioning company Carrier,⁸ the MGM Grand Hotel,⁹ and the Allstate insurance company.¹⁰

Pro tip: If the Biller didn't want to wait so long for its money, it could consider factoring its accounts receivable, namely selling its invoice(s) to a third-party "factor" — but at a discount from face value. See generally Note.

(A strong-arming customer's purchase order form might purport to prohibit the Biller from factoring the customer's invoices.)

Relatedly, see the discussion of "pledges," to a creditor by a debtor, of the debtor's right to be paid under a contract, at 15.3.

Not all charges for past-due amounts will be deemed "interest" under applicable law.

().  Here are a few examples of charges that were held not to constitute usurious interest under Texas law:

• A bank's service fee for a bounced check (an "NSF charge"); See First Bk. v. Tony's Tortilla Factory, Inc., 877 S.W.2d 285, 285 (Tex. 1994).
• A cable-TV provider's administrative fee, charged for late bill payment. See Garcia v. Texas Cable Partners, L.P., 114 S.W.3d 561 (Tex. App.—Corpus Christi 2003) (affirming summary judgment in favor of cable company) (citing cases); see also, e.g., Gomez v. Niemann & Heyer, L.L.P., No. 1:16-CV-119-RP (W.D. Tex. Oct. 7, 2016) (denying motion to dismiss claims against debt-collector law firm; citing Garcia) (see also earlier order explaining background).

In Southwest Concrete (1990), California's supreme court ruled that the state's usury law does not cover interest charged on overdue commercial accounts. As explained in Sunstate (Cal. App. 2023), the contract at issue in Southwest Concrete, for rental of construction equipment, allowed the renter to be charged interest on late payments at 18% per year. The supreme court ruled that:

• the state's usury law limits the interest payable for the loan or forbearance of money; and

• the substance of the transaction did not have "as its true object the hire of money at an excessive rate of interest." Southwest Concrete Prods. v. Gosh Constr. Corp., 51 Cal.3d 701, 704, 798 P.2d 1247 (1990) (affirming court of appeals's affirmance of denial of motion for JNOV or new trial on grounds of usury), discussed in Sunstate Equip. Co. v. Eagle Environmental & Constr., No. A167708, slip op. (Cal. App. Dec. 15, 2023) (unpublished) (reversing trial court's award of only 7% interest).

  Relatedly: Some professional athletes have sold the right to receive a percentage of the athletes' future earnings in return for an upfront payment. Such an arrangement has been referred to as an "income purchase agreement," resembling a venture-capital investment agreement. For example:

• As a minor leaguer, Fernando Tatis, Jr. received (reportedly) a $2 million advance from a buyer, Big League Advance (which was started by a former MLB pitcher) in exchange for 10% of his future earnings.
• Tatis later signed a $340 million contract extension with the San Diego Padres — which would have entitled the buyer to more than $30 million from the arrangement.
• Tatis sued to void the contract; at this writing, the suit is pending. See Timothy Hurley, The Cost of An Early Payday: Lessons from Tatis Jr.'s Advance Financing Agreement (JDSupra.com 2025); Associated Press, Padres' Tatis sues Big League Advance to void deal signed at 17 (ESPN.com 2025).

Under New York law, "a stock conversion option that permits a lender, in its sole discretion, to convert any outstanding balance to shares of stock at a fixed discount should be treated as interest for the purpose of determining whether the transaction violates N.Y. Penal Law § 190.40, the criminal usury law"; and "if the interest charged on a loan is determined to be criminally usurious under N.Y. Penal Law § 190.40, [then] the contract is void ab initio …." Adar Bays, LLC v. GeneSYS ID, Inc., 37 N.Y.3d 320, 324 (2021), on certification from Second Circuit in 962 F.3d 86 (2d Cir. 2020), subsequent proceeding, Adar Bays, LLC v. GeneSYS ID, Inc., 28 F.4th 379 (2d Cir. 2022) (vacating and remanding summary judgment order).

A federal trial court in California held that a usury-savings clause operated only in the event of default in payment on promissory note and did not "unconditionally operate to limit the interest rate [on the note] to the maximum non-usurious rate." Consequently, the court denied the lenders' motion for summary judgment.

In re Village Concepts, Inc., slip op. at part V.H (E.D. Cal. Mar. 17, 2015) (cleaned up).

By statute in Texas (and other jurisdictions), clearly offering a lower price for cash payment, as well as a higher credit- or time-based price, doesn't count as interest if the purchaser knowingly chose the higher price. See Spence, supra, at 27 (with extensive citations, including Tex. Fin. Code § 301.002(4)).