The Lawyer is In: Contract Basics

Whether you are drafting your own, or reviewing another company’s contract, there are key terms to look for, and some terms to avoid. Key terms to look for:

GOODS/SERVICES
The contract should contain a detailed summary of the goods and/or services. Often these can be included as an exhibit to the contract. When drafting or reviewing the summary, keep in mind that if you are the buyer, you want the summary to be as comprehensive as possible; if you are the seller, you want to make the summary clear and identify items that are not included, but may be available at an additional cost.

COMPENSATION
The contract should clearly state the compensation amount for the goods and services or a formula for determining compensation (e.g., $10 per square foot). The contract should also provide when the compensation is due. As with all things involving money, it’s always best to argue about money when you are holding it rather than when the other party is holding it. Holding on to payments allows for leverage if you are purchasing goods and services and they are not provided properly.

EXITS
Just like any room needs an exit, so does a contract. There are typically two types of exits in contracts: termination for cause and termination for no cause (sometimes referred to as “termination for convenience”). The “for cause” exit is triggered if either party is in breach of an obligation under the terms of the contract, (e.g., did not deliver the materials by the due date). The exit allows for termination as a result of breach. Some contracts give the breaching party time to cure or fix the breach before the exit can be used. For “no cause” terminations, the exit can be triggered by one or both parties with a given notice period, (e.g., 60 or 90 days, in advance of the termination date). Regardless of which exit is used, the provider of goods and/or services is entitled to be compensated for all work performed to date of termination.

INSURANCE
It is important to ensure that the party providing goods and services carries liability insurance and the contract should refer to the types and coverage amounts of insurance. A certificate of insurance should be provided as well.

INDEMNIFICATION
This is an important risk management technique that should be included in every contract. Essentially, the provision says, “take responsibility for your services/goods. I’m paying you to do a job, I expect the job to be done right, and if you mess up and we both get sued, you will ‘hold me harmless’ from any financial liability as a result of your negligence.” It serves to shift risk to the party that can best control risk. So let’s say the supplier manufactures tools for your company’s use. Your company gets sued by someone who got hurt by the tool. It is determined that the tools were not manufactured properly. With an indemnification provision, the manufacturer would have to make sure you are not financially harmed by the lawsuit (e.g., hire attorneys to defend the lawsuit on your behalf and to pay any damages awarded against you).

NON-ASSIGNMENT
You are contracting with a company to provide goods or services because it is their company. If their company gets bought out the day after the contract is signed, you may not want to do business with the new company. As such, a non-assignment provision typically provides that neither party may assign its rights or responsibilities under the contract without the prior written consent of the other party.

Key terms to avoid:

PREVAILING PARTY ATTORNEY’S FEES
It is the general rule in the United States that each party pays for its own attorney’s fees when there is a dispute. As such, contracts do not need to specify payment of attorney’s fees. However, often you may see a provision that states that if there is a dispute arising out of the contract, the prevailing party is entitled to recover its attorney’s fees from the non-prevailing party. Basically, it’s a nice way to say that the loser pays the winner’s attorney’s fees and its own. I don’t like to gamble, and I don’t recommend gambling on attorney’s fees. The risk is high that this provision will be part of any settlement discussion and the party that claims they are owed money will use it to force the other to settle.

DISPUTE RESOLUTION
Many contracts include a provision regarding dispute resolution. Often this provision refers to which state law will govern the contract and which courts have a forum to hear the dispute. But other contracts specify that disputes be resolved by mediation or arbitration. Because each of these options can have a significant impact on the dispute and the cost to resolve the dispute, I do not recommend agreeing to any type of dispute resolution process unless you have first consulted your legal counsel to determine which, if any, dispute resolution option is best for your company.

LIMITATION OF LIABILITY
These provisions are often found in “ALL CAPS” in contracts as they are required to be conspicuous to the reader. Essentially, the language serves to limit a party’s liability for certain types of damages (such as indirect and consequential damages or lost profit) and/or tries to cap liability at the dollar amount that would have been paid under the agreement. So, $10,000 for 1000 boards means that if there is a claim regarding the quality of the boards, the most you could recover from the manufacturer would be $10,000.

DATE BY WHICH SUIT MUST BE FILED
Some contracts state that if there is a dispute arising under the contract, it has to be filed within a specified time frame after contract completion, (e.g., one year), or it is not valid. Often disputes do not arise right away, and I do not recommend putting your company “on the clock” if it receives notice of a claim one year and one day after the contract completion.

JURY TRIAL WAIVER
Under most types of litigation, parties are able to request a jury trial. However, some companies do not want to take the risk of a runaway jury, so they ask the other party to waive (give up) the right to a jury trial. That is not recommended given that you don’t know what kind of dispute will arise, whether a jury trial would benefit you, etc.

As with any of these items, I recommend consulting with your legal counsel to find out which provisions they do and don’t recommend for your contracts.

Barbara Dunn O’Neal is a Partner with the Associations and Foundations Practice Group at Barnes & Thornburg where she concentrates her practice in association law and meetings, travel, and hospitality law. She can be reached at 312.214.4837 or barbara.dunnoneal@btlaw.com.

This article shall not be considered legal advice. In all cases, groups should consult their legal counsel.

 

 

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