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Bulletproof Terms for Every Contract

Excerpted From Business Contracts (Entrepreneur Press)

ncluding certain clauses in your contracts will reduce risks to your company from lawsuits and misunderstandings and provide legal rights that your company might not otherwise have. Samples of these provisions are included below, along with a discussion of what each provision means and why it's needed in a contract.

You may encounter clauses in contracts you review or in a contract form that cover the same subject matter but are worded differently. The subject matter of these provisions is important-the exact wording is not. As long as the plain sense meaning is the same, it's not critical to use the wording in the provisions presented here. It is critical to consider including these clauses in every contract your company signs, although you may decide some clauses are unnecessary in certain contracts. The important part is to decide what business risks are present in the deal your contract documents, and to remove or reduce these risks by using these clauses.

1. Assignment/Subcontracting: Four Alternatives
Neither party shall have the right to assign or subcontract any part of its obligations under this agreement.

This prevents both your company and the company you're contracting with from transferring the entire agreement or subcontracting any part of it to another person or business. An assignment of the contract might occur if either your company or the company you contracted with was sold (the new owner could be assigned this contract). A subcontract might occur if an independent contractor or another company was hired to perform the work that either your company or the other company had agreed to perform. Contracts are presumed assignable unless there is a clause like this one in the agreement preventing an assignment. This clause would not prevent either company from giving its consent to an assignment or a subcontract, but without such consent an assignment or subcontract would be a breach of contract.

Neither party shall have the right to assign or subcontract any of its obligations or duties under this agreement without the prior written consent of the other party, which consent shall not be unreasonably withheld or delayed.

This prevents any transfer of the agreement to any other person or business except where the other party provides written consent. The decision on consent must be promptly provided and a decision not to consent must be based on some reasonable reason.

Neither party shall have the right to assign or subcontract any of its obligations or duties under this agreement, without the prior written consent of the other party, which consent shall be in the sole determination of the party with the right to consent.

This prevents any transfer of the agreement to any other person or business except where the other party provides written consent. The decision on whether to provide consent can be based on any reason at all, even an unreasonable one.

Notwithstanding the foregoing, either party may, without the consent of the other party, assign the agreement to an affiliate or subsidiary or to any person that acquires all or substantially all of the assets of a party.

This provision would be included with one of the provisions above that either prevents assignment or allows it with consent. This caveat to those provisions allows a transfer of the agreement without the other party's consent if the transfer is to an affiliate company (usually defined as a company with at least 50 percent of the same owners or shareholders), a subsidiary company, or to an entity that buys the company the contract is with.

If it's important to your business deal that the contract is performed by the party you are contracting with, then this clause is important to include when documenting the deal. If your company might be sold, might want to subcontract all or part of its duties under a contract, or might want to transfer a contract to an affiliate or subsidiary company, then it's important not to include or agree to a clause preventing assignment or subcontract.

2. Attorney's Fees
The non-prevailing party in any dispute under this agreement shall pay all costs and expenses, including expert witness fees and attorneys' fees, incurred by the prevailing party in resolving such dispute.

This clause creates a right to recover costs and expenses paid by the party that prevails in a contract dispute. The way this clause is worded, the costs and expenses are not limited to those paid in a lawsuit-the costs and expenses incurred in any contract dispute could be recovered. It's just as common to see this clause written to apply only to costs and expenses incurred by the prevailing party in a lawsuit. Some states have laws that provide for the prevailing party in a contract lawsuit to recover its legal fees and costs from the non-prevailing party. If the state where a lawsuit occurs does not have such a law, this contract provision would provide the same right. This provision is thought to discourage frivolous lawsuits because the party filing a lawsuit risks payment of the other party's legal costs if the suit is lost.

If the law of your state gives the prevailing party in a contract lawsuit the right to recover its legal fees, you could eliminate this clause from your company contracts. However, unless the law allowed recovery in any "dispute" vs. any "lawsuit," this contract clause provides a broader right to recover your costs and might be worth including anyway. If your state has no law providing for recovery of legal fees, if your company has to sue to recover a payment due, this clause will be invaluable in making the lawsuit cost-effective.

3. Choice of Law or Governing Law
This agreement shall be governed by and construed in accordance with the internal laws of the State of XXX, U.S.A., without reference to any conflicts of law provisions.

This provision requires the law of the state your company designates to be used to interpret this agreement. To be legally effective, the state law your company designates must have some relationship to the parties to the contract or a relationship to the agreement. Most companies designate the state where their home office is located. This designation benefits your company because your company is operating under these laws already, is familiar with them, and has attorneys who are familiar with them. If no state law is designated, a court could interpret this agreement under the laws of the state where either business is located or was incorporated (the most likely scenario), or where the contract was performed or signed. Having this clause in a contract reduces the risk that another state's laws could be applied to the agreement with results you don't like or anticipate. If both parties to the contract are headquartered in the same state, it is unlikely that any other state law would be applied to interpret the agreement, and thus this clause could be eliminated.

In my experience, the legal departments of larger companies often dictate to their business people that this clause must name the law of the big company's state to be the governing law for the agreement. The business people are then left being able to negotiate business points like payment, quantity, and delivery date but with no flexibility on the governing law point. It's possible to use this to your company's advantage by holding out for deep concessions on the business points that benefit your company before agreeing to a governing law clause that names the big company's state. Whenever the other party to a contract tells you their legal department insists that the governing law be their state law, you know you have an advantage.

4. Choice of Venue
Each party hereby submits to the exclusive jurisdiction of, and waives any venue or other objection against, any federal court sitting in the State of XXX, U.S.A., or any XXX state court in any legal proceeding arising out of or relating to this contract. Each party agrees that all claims and matters may be heard and determined in any such court and each party waives any right to object to such filing on venue, forum non-convenient, or similar grounds.

The choice of law or governing law provision determines what state law is applied to the contract, while this clause determines what state court system can resolve the dispute. Each party will want to file a lawsuit in the state they are headquartered or do the most business in. That's usually because their lawyers are familiar with those courts, their employees will not have to travel to participate in the lawsuit, and it is generally thought that courts favor local "residents." This provision creates an enforceable agreement between the parties that lawsuits can only be determined in the courts of the named state.

5. Compliance with Laws
Each party shall comply in all respects with all applicable legal requirements governing the duties, obligations, and business practices of that party and shall obtain any permits or licenses necessary for its operations. Neither party shall take any action in violation of any applicable legal requirement that could result in liability being imposed on the other party.

This clause may seem redundant because both parties to the contract have to comply with the law for reasons independent of the requirements of this contract. What this clause does is to make a failure to comply with the law a breach of contract. Without this clause, violation of the law would have no effect on the contract. If a violation of the law would have a negative effect on your company, either because your company might be jointly liable or might experience bad publicity, this clause is important to include so that you can terminate the contract and/or receive damages for the harm.

6. Conflicts
The terms of this Agreement shall control over any conflicting terms in any referenced agreement or document.

Any time a contract is created that incorporates or refers to another document, there is the possibility that a provision in one document will conflict with a provision in the other document. For that reason there should be a provision in at least one of the documents stating how such conflicts should be resolved. It's best to identify one document that takes precedence over all the others.

7. Cumulative Rights
Any specific right or remedy provided in this contract will not be exclusive but will be cumulative of all other rights and remedies.

Without this provision the contract could be interpreted to mean that the exercise of one remedy in a contract prevents the exercise of other remedies. For example, a court might find that terminating the contract prevents your company from suing to recover past due payments. This provision creates a contractual right to exercise any and all remedies in the contract.

8. Force Majeure
Neither party shall be held responsible for any delay or failure in performance of any part of this agreement to the extent such delay or failure is caused by fire, flood, explosion, war, embargo, government requirement, civil or military authority, act of God, or other similar causes beyond its control and without the fault or negligence of the delayed or non-performing party. The affected party will notify the other party in writing within ten (10) days after the beginning of any such cause that would affect its performance. Notwithstanding, if a party's performance is delayed for a period exceeding thirty (30) days from the date the other party receives notice under this paragraph, the non-affected party will have the right, without any liability to the other party, to terminate this agreement.

This means that if some unforeseen event prevents either party from performing their part of the contract, the non-performance will not be considered a contract breach. The party experiencing the event must inform the other party that its performance under the contract is delayed and if the delay lasts more than 30 days, the contract may be terminated by the other party. The catastrophic events listed should include those applicable to your business, the notice period should be long enough to allow the affected company to provide the notice, and the time period giving rise to the right to terminate should be fair to both parties.

9. Indemnity
Each party shall indemnify, defend, and hold the other party harmless from and against any and all claims, actions, suits, demands, assessments, or judgments asserted, and any and all losses, liabilities, damages, costs, and expenses (including, without limitation, attorneys fees, accounting fees, and investigation costs to the extent permitted by law) alleged or incurred arising out of or relating to any operations, acts, or omissions of the indemnifying party or any of its employees, agents, and invitees in the exercise of the indemnifying party's rights or the performance or observance of the indemnifying party's obligations under this agreement. Prompt notice must be given of any claim, and the party who is providing the indemnification will have control of any defense or settlement.

This means that one party (the indemnifying party) will pay the damages, claims, expenses and other types of payments listed in this provision if the other party (the indemnified party) as well as those related to the indemnified party listed in the provision, incurs damages as a result of something the indemnifying party does related to the agreement. The things the indemnifying party could do that would result in liability to the indemnified party are listed at the end of the provision (essentially acts or omissions under the agreement). This provision requires that the indemnified party promptly notify the indemnifying party of a claim and allow that party to control the defense or settlement of the claim.

An indemnification provision addresses the risk that your company might be liable for damages resulting from something the other party does related to the contract. For example, your company has a contract to buy ground beef from another company, which it then incorporates into its frozen lasagna product. If the ground beef is tainted and results in sick consumers, this provision in the contract requires the ground beef supplier to defend any action against your company resulting from the tainted ground beef and to pay all costs and damages. If this provision were not in the contract, your company would have to sue the other company to obtain a judgment for the damages and costs it incurs as a result of the tainted ground beef.

10. Insurance
Each party agrees to maintain insurance in commercially reasonable amounts calculated to protect itself and the other party to this agreement from any and all claims of any kind or nature for damage to property or personal injury, including death, made by anyone, that may arise from activities performed or facilitated by this contract, whether these activities are performed by that company, its employees, agents, or anyone directly or indirectly engaged or employed by that party or its agents.

This clause requires each party to maintain insurance to protect itself and the other party from damage claims that might result from performing a required action under the contract. If there is a damage claim and no insurance and the party that causes the damage can't pay the claim, the damaged party is likely to sue your company (the one that did not cause the damage) on the theory that, as the other party to the contract, your company had some culpability for the damage. With an insurance payout, your company is more likely to be insulated from such a claim.

I have underlined a section of this clause that turns the clause from one that reduces risk to one that creates an almost impossible burden to fulfill. The underlined section requires that the amount of insurance be enough to protect both parties from all claims. An insurance clause that requires your company to maintain insurance in amounts sufficient to cover all claims against either party should be revised to require insurance in reasonable amounts. The clause above would meet this requirement if the underlined section were removed and replaced with a transition word such as: "Each party agrees to maintain insurance in commercially reasonable amounts calculated to protect itself and the other party to this agreement from any and all covering claims of. . . ."

11. Integration Provision or Entire Agreement
This agreement sets forth and constitutes the entire agreement and understanding of the parties with respect to the subject matter hereof. This agreement supersedes any and all prior agreements, negotiations, correspondence, undertakings, promises, covenants, arrangements, communications, representations, and warranties, whether oral or written, of any party to this agreement.

This means that the contract containing this provision is the only agreement that a court will examine to determine what the "deal" or agreement between the parties was. No other written documents or verbal statements can be used as evidence in a dispute over the agreement.

This is a very important provision to have in all contracts. Without this, the written agreement could be considered just one piece of evidence in determining what the deal between the parties was. E-mails, notes, conversations, and anything else related to the contract could be used to interpret the agreement. Without this provision, the contract would not be considered a complete documentation of the deal-only one piece of that documentation. Be certain that this provision lists every document that is part of this agreement. If a schematic, drawing, blueprint, statement of work, or other supplementary statement is needed to understand the contract, then that document must be referenced and incorporated into the agreement. Otherwise the other documents will not be considered part of this contract because of this paragraph.

 

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