What your mom taught you about telling the truth is still good advice. While it may seem to go without saying, at least one judge has reaffirmed your mother’s rule: “it’s not okay to lie,” even if your contract says you don’t have to tell the truth. In Abry Partners V, L.P. v. F&W Acquisition, LLC, the court had to decide whether a very explicit disclaimer of all warranties and representations would be enforced to limit the liability of a company that had knowingly made false representations to induce the sale of the business to another company.

On its face, the disclaimer was very clear – the company that made the false representations had no contractual duty to tell the truth to the acquiring company, and any liability for false statements was limited to a predetermined amount. While the exact wording of the disclaimer may be too long to repeat here, it might as well have said: “Company A may make any false statement or misrepresentation to Company B to induce the sale, and Company B’s only legal remedy shall be capped at XYZ dollars.” This kind of disclaimer was written in two different sections of the sales contract.

Yet writing something in a contract doesn’t necessarily make it so. Judges have broad discretion regarding the enforcement of contract terms. Even though both Company A and Company B were sophisticated businesses with teams of legal professionals to advise this multi-million dollar transaction, the judge in this case held that it would be against public policy to enforce the disclaimer and to protect the company that made false representations.

What’s the moral of this story? Honesty isn’t just the best policy – it’s the law of the land, and no wording in a contract will change that. Further, as a general rule, you can’t rely solely upon the wording of a contract to forecast the outcome of potential legal disputes. Ultimately, courts strive to preserve justice, and a judge may easily override overbearing or unfair contracts.

Today’s blog is about the most fundamental issue in contract law: do you actually have a contract? While this might seem like a no-brainer, you’d be surprised at how many sophisticated businesses file lawsuits to dispute particular terms in a “contract” only to get the unpleasant surprise that the disputed terms are moot because there was no legally enforceable contract at all. Here are the necessary elements of a legally binding contract.

Taking shortcuts with your business and legal strategies can get you in trouble. If you are an out-of-state company doing business in Texas, you are a “foreign corporation” that must register with the State of Texas and acquire a certificate of authority under the Texas Business Corporation Act. While some companies may consider shortcutting this requirement, failure to register your foreign corporation will have costly consequences.

The old adage “time is money” is nowhere more true than in the tech industry, where it’s often more advantageous to buyout another company for its technology instead of investing time and money in an in-house development project. Due diligence is generally a process oriented around discovering information about a target company and its technology, but it’s also a delicate process that must be structured defensively to protect a prospective buyer from future litigation.

A prospective buyer takes on great risk in the due diligence process. The process provides the buyer with a wealth of knowledge about the target company’s trade secrets and other confidential information. Where the buyer decides against acquisition, the target company might sue for willful misappropriation if it believes that the prospective buyer later infringed upon intellectual property revealed in the due diligence process.

To guard against future lawsuits and to fortify available defenses, prospective buyers should design and implement multiple mechanisms of “defensive due diligence.” The first step in this process is to define the essential goals of the acquisition, specifically identifying the scope of the technology that the buyer wishes to obtain and the purpose that technology will serve for the buyer. Providing this limited focus for your due diligence team will prevent inadvertent discovery of extraneous confidential information that might later become the subject of a lawsuit.

The second step is for the prospective buyer to identify and document all of its own prior or current efforts to develop technology similar to the other company’s targeted technology. Thorough documentation of the buyer’s concurrent technology development will provide the front line of defense in a lawsuit alleging that the prospective buyer misappropriated the target company’s intellectual property.

A third and critical step is to plan the methods of holding, transferring, and communicating the acquired information among and between due diligence team members. This is imperative to protect the information from leaking outside of the due diligence team. Also, if the prospective buyer decides against acquisition, all confidential information must be destroyed – a daunting (and sometimes impossible) task if the document management and communication systems are not strictly structured and implemented.

As with any endeavor, a business seeking to obtain technology through merger or acquisition must “look before it leaps” to safeguard against future legal woes. While a large part of the due diligence process involves an “offensive” strategy of discovering a target company’s weak points, it’s also important to have a good “defensive” game, too. A comprehensive defensive due diligence strategy that includes the three steps outlined above can prevent many future lawsuits from emerging and can provide the elements of a strong defense when litigation rears its ugly head.