Contracts are an essential part of doing business. Regardless of size or industry, contracts with customers, vendors, suppliers, service providers or independent contractors are an important part of a business’s operations. While good contracts can help manage risk and maintain good working relationships, bad contracts can be incredibly harmful. This is why every business must proceed cautiously when negotiating and signing contracts.
Ideally, an attorney will be consulted when negotiating or signing contracts. The reality, however, is that many businesses handle their own contracts. Though it may be easy for some to identify and understand a contract’s main provisions, like cost, volume, part numbers, etc., the devil is in the details, which, in the case of contracts, is the fine print.
Every provision in a contract has a purpose, including those found in the fine print. Despite being underemphasized, they are often important when defining a contractual relationship, particularly when things go wrong. The following provisions, for example, are not only commonly used, but commonly overlooked.
Forum (Jurisdiction) Selection: A contract may require that any lawsuits involving the contract be filed in a specific forum or jurisdiction (county, state, country). This may not be a problem if a business is located in the jurisdiction specified in the contract. However, it may be a huge problem if, for example, a Florida business is required to file a lawsuit in Alaska. Despite having the legal right to enforce the contract, the increased complexity and cost of filing a lawsuit in another jurisdiction makes it practically impossible for many businesses to do so, particularly when relatively small amounts of money are involved.
Choice of Law: Similar to a forum selection clause, a choice of law provision specifies which state’s law will be used to interpret and enforce the contract. These clauses can be significant because laws may vary from state to state. For example, one state may have more favorable consumer protection laws, while another makes it more difficult to recover damages. It is important to know if and how a choice of law provision may affect any contractual rights or remedies.
Integration (Merger) Clause: Contracts typically contain a provision stating that the contract represents the full and final agreement and supersedes any other agreements, oral or written. With an integration clause, any verbal or written conversations, brochures, promises, representations or statements that are not included in the contract are not part of the contract. This may become an issue when a business is not receiving what the salesperson promised before signing the contract. Expectations, obligations and requirements must be included in the contract to be enforceable under the contract.
Assignment: A contract may allow one or both parties to assign their rights, duties or obligations to a third party. This can create a problem if there is an expectation that a specific person or company will be performing under the contract. If, for example, a business wants only a specific vendor to do a job, the contract must state that the vendor cannot assign its obligations under the contract to someone else. Otherwise, a business may find that the person they contracted with isn’t the person they end up working with.
Evergreen Clause: Contracts are typically entered into for a specific period of time (term). A contract with an evergreen clause will automatically renew for a new term unless notice of termination is given by either party, usually within a specific period of time. For example, a one year contract will automatically renew for another year unless written notice of termination is given at least 60 days before the end of the yearly term. Businesses that fail to discover and comply with an evergreen clause may be stuck in a contract they no longer need or want.
Dispute Resolution: Contracts may require that disputes be resolved through arbitration rather than by filing a lawsuit. Depending on the nature of the contract, this requirement can significantly affect the resolution of disputes and the apportionment of damages.
Indemnification Clause: Indemnification clauses are used to allocate risk and responsibility among the parties to a contract by requiring one party to compensate the other for specific liabilities or losses arising out of the contract. Since these clauses commonly require a party to assume liability that would not otherwise exist, they must be reviewed carefully and understood completely. Indemnification clauses often end up being the most significant provision in a contract when something goes wrong.
Insurance Requirements: Many contracts include specific insurance requirements. For example, a contract may require a party to have general liability or workers’ compensation insurance, or it may require that one party be given Additional Insured status under the other party’s insurance policies. Contracts often require proof of insurance before work can begin or payment is made. It is important to identify and comply with any contractual insurance requirements.
Despite the benefits of using an attorney to negotiate and review contracts, particularly complex or high-value contracts, many businesses take a do-it-yourself approach. Nevertheless, given the increased risk of harm caused by bad contracts, businesses should never sign a contract without reading and understanding every provision, including those in fine print.
If you have any questions or would like to discuss how Setnor Byer Insurance & Risk can help identify and protect against various business risks, please contact us.
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