Excerpted From Business Contracts (Entrepreneur Press)
Including 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.
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.
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.
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.
Limit of Liability
12. Limit of Liability
In no event shall either party be liable to the other or any third party in contract, tort or otherwise for incidental or consequential damages of any kind, including, without limitation, punitive or economic damages or lost profits, regardless of whether either party shall be advised, shall have other reason to know or in fact shall know of the possibility.
If one party to this contract causes damages to the other party, the injured party has the right to recover the cost of the damages from the party causing the injury. Damage costs that could be recovered include direct damages, which are damages that are a direct result of what happened, like medical costs or property damage, and indirect damages. Indirect damages are those that are not directly caused by the other party but that are incurred because the party was injured. For example, if Business One manufacturers and delivers a widget with a loose flywheel to Business Two and the flywheel comes off injuring Business Two's customer, the injury to Business Two's customer would be direct damages resulting from Business One's faulty widget. The damage to Business Two's business reputation from the accident would be indirect damages to Business Two.
This provision means that an injured party cannot recover the costs of indirect damages resulting from an injury. It has no effect on either company's liability for direct damages. Indirect or consequential damages can be huge, so disclaiming them is a way of reducing risk in the contract. Some states have laws that require a disclaimer of liability in a contract to be conspicuous within the contract to be enforceable. For that reason these provisions are seen in all capital formats, bolded, set in a larger font than the surrounding text, or otherwise distinguished from the rest of the contract.
In no event shall either party be liable for any incidental or consequential damages. Seller's liability and buyer's exclusive remedy for any cause of action arising in connection with this contract or the sale or use of the goods, whether based on negligence, strict liability, breach of warranty, breach of contract, or equitable principles, is expressly limited to, at seller's option, replacement of, or repayment of the purchase prices for that portion of the goods with respect to which damages are claimed. All claims of any kind arising in connection with this contract or the sale or use of the goods shall be deemed waived unless made in writing within sixty (60) days from the date of seller's delivery, or the date fixed for delivery in the event of nondelivery.
This provision might be included in a seller's purchase order or sales agreement. It disclaims liability for consequential damages on behalf of both parties. It limits the seller's liability for any other type of damages to the two options listed in the provision, at seller's election, and it establishes a contractual statute of limitation for any action arising from the agreement. This is a short time frame in which to make a claim under the contract, which would greatly decrease the likelihood of a claim being filed. If your company is likely to be the one having the claim filed against it (in this case the seller) this would be an advantage. If your company is likely to be the one filing the claim (in this provision, the buyer) the short time frame in which to do so represents a significant concession because most states allow contract claims to be filed four or more years after the claim arises.
All notices shall be in writing and shall be delivered personally, by United States certified or registered mail, postage prepaid, return receipt requested, or by a recognized overnight delivery service. Any notice must be delivered to the parties at their respective addresses set forth below their signatures or to such other address as shall be specified in writing by either party according to the requirements of this section. The date that notice shall be deemed to have been made shall be the date of delivery, when delivered personally; on written verification of receipt if delivered by overnight delivery; or the date set forth on the return receipt if sent by certified or registered mail.
Contracts typically require one party to provide notice to the other party in the event one party thinks the contract was breached, when termination of the contract is desired, or in other instances specific to each contract. This provision sets out the requirements for how and when a notice must be made to be legally valid. It states that a legally valid notice must be in writing and be sent to a designated address. It also defines when a notice is deemed to have been received, which is important if some time period starts on the receipt of a notice. This might be the case where a party to the contract has to make a late payment within five days of receipt of a late payment notice or otherwise the contract terminates.
If the agreement omits this provision, a dispute could arise concerning whether a notice was given at all ("Harry said he told you the payment was late"), whether it was received ("You sent it to our warehouse, not our corporate office"), and when it was received, rather than a date and time easily verified or calculated according to the contract provisions. Including an address where notices must be sent is good practice to assure they are received where your company can best react to them.
14. Relationship of the Parties
The relationship of the parties under this agreement is that of an independent contractor and the company hiring the contractor. In all matters relating to this agreement each party hereto shall be solely responsible for the acts of its employees and agents, and employees or agents of one party shall not be considered employees or agents of the other party. Except as otherwise provided herein, no party shall have any right, power, or authority to create any obligation, express or implied, on behalf of any other party. Nothing in this agreement is intended to create or constitute a joint venture, partnership, agency, trust, or other association of any kind between the parties or persons referred to herein.
This provision defines the relationship between the contracting parties. Some business arrangements create the legal right for one party to bind the other party to contracts and other obligations. Some relationships create the potential for employment-related liabilities for the other company's employees. Courts will sometimes find that a joint venture, partnership, agency, trust, or other association exists where none was intended by the parties. These types of relationships mean that one party may have the right to incur liabilities on behalf of the other party, or otherwise act on the other party's behalf. To avoid the possibility one of these relationships may be inferred where it was not intended, this provision should be included in a contract.
If any provision of this agreement shall be declared by any court of competent jurisdiction to be illegal, void, or unenforceable, the other provisions shall not be affected but shall remain in full force and effect. If the non-solicitation or non-competition provisions are found to be unreasonable or invalid, these restrictions shall be enforced to the maximum extent valid and enforceable.
If the law changes, making a term in a contract unenforceable or even illegal, the entire contract may be void because it contains the now illegal or unenforceable term. A provision such as this may allow the court to simply delete the term, leaving the rest of the contract to stand as it is. Whether a court will do that is a matter of state law, but it's wise to have this sentence in case the state court does allow striking only the offending provision. In cases where the contract includes a non-solicitation or non-competition provision, this provision would allow a court to interpret those provisions to comply with the law. For example, a non-competition provision may state that the former owner of your business cannot open a similar business within 50 miles of the old business. If a law were passed that stated that a non-competition provision restricting creation of a new business within 10 or more miles of the old business was unenforceable, the severability provision would allow a court to interpret the non-competition provision to restrict businesses within 9 miles rather than the 50 stated in the contract.
16. Successors and Assigns
This agreement shall be binding on and inure to the benefit of the parties hereto and their respective heirs, legal or personal representatives, successors, and assigns.
Generally contracts are only binding on the parties that sign them. Even when they are assigned from one party to the contract to a new party, the assignment is a contract between the assignor and the assignee and doesn't require the other party to the assigned contract to go along with the assignment. There are other instances where the other party to the contract could change, such as when the company is sold or if the individual that owns it dies. In those instances, without this clause the contract might not be binding on the new owners or the heirs. If your company wants to enforce their bargain for the full duration of the contract, this clause should be included.
All provisions that logically ought to survive termination of this agreement shall survive.
If an agreement ends, every provision in it is no longer effective. There are some provisions your company will want to continue to be effective after the termination or expiration of the agreement, such as Indemnification, Limitation of Liability, and Governing Law and Forum. The Survival provision allows provisions that logically are intended to govern events related to the agreement that could occur after the agreement ends to continue to govern those events.
18. Termination for Cause
If either party breaches any provision of this agreement and if such breach is not cured within thirty (30) days after receiving written notice from the other party specifying such breach in reasonable detail, the non-breaching party shall have the right to terminate this agreement by giving written notice thereof to the party in breach, which termination shall go into effect immediately on receipt.
This means that the contract may be terminated only when the other party breaches the agreement and then, only when the non-breaching party sends a notice of breach to the other party and allows the breaching party 30 days to cure the breach. After 90 days, another notice must be sent to actually terminate the contract. If this procedure were not followed exactly, there would be no right to terminate the contract. Any attempt to do so without following this procedure would be a breach of the agreement. An alternative is to provide for immediate termination on a breach, but if this is a provision applying to both parties, consider the effect on your own company if it is the one missing the payment deadline by one day, for example.
There should always be a provision for terminating a contract before each party's agreed-on duties have been completed. Once both parties have agreed on a termination procedure such as the one set forth here, think through the effects on your company and allow for them in the termination provision. For example, if the contract were terminated early, should there be provisions for payments to cover work completed but not yet paid for?
19. Termination for Convenience
This agreement may be terminated by either party on thirty (30) days advance written notice effective as of the expiration of the notice period.
The previous provision requires the contract to be breached before the other party can move to terminate it. The non-breaching party would never have an opportunity to terminate the agreement. This provision allows either party to terminate the contract for any reason and no reason once the party desiring to end the contract sends a notice to the other party and then allows 30 days to expire. This provision provides the maximum flexibility to both parties, with the corresponding risk that if your company does not want to terminate and the other party elects to, your company will have lost the benefit of its bargain.
20. Termination on Insolvency
Either party has the right to terminate this agreement where the other party becomes insolvent, fails to pay its bills when due, makes an assignment for the benefit of creditors, goes out of business, or ceases production.
This provision provides an automatic right of termination if the other party has financial problems or is no longer a going concern. Without this provision, a contract with no other termination provision would continue in force.
This could be a problem in many contractual situations. An example would be where your company has an exclusive agreement with a distributor to place your product in stores. If the distributor closed its doors, your company would seek another distributor and sign another exclusive distribution agreement. If the original distribution company reopened a year later it could sue your company for violating the exclusive contract your company had with it.
Many of these types of provisions in form agreements state that if a party declares bankruptcy, the agreement can be terminated. Most of the companies I have seen go out of business do not declare bankruptcy but simply shut down. This provision allows termination in that situation.
It's also important to address the situation in which it is widely known in the industry that a business is in dire financial straights, but your company has a contract to provide the company with products or services. Your company would not want to do this knowing the other company is unlikely to pay its bill to your company. This provision would allow your company to terminate its contractual obligations in the event the other company was insolvent or failed to pay its bills.
Failure of either party to insist on strict compliance with any of the terms, covenants, and conditions of this agreement shall not be deemed a waiver of such terms, covenants, and conditions, or of any similar right or power hereunder at any subsequent time.
This means that failure to enforce a term in the contract does not mean that your company has elected not to ever enforce that term. For example, this provision retains the right of your company to ignore or forgive one contract breach and still enforce a breach of the same term at a later time. If this provision is omitted, your company runs the risk of having a court find that waiving a term in the contract results in that contract term being unenforceable during the term of the agreement. For example, if your company accepted a payment one day late it might be found to have waived any right to enforce a contract provision requiring payment on a certain date or within a certain time.
22. Warranty Disclaimers
Except as expressly stated in this agreement, the seller expressly disclaims and negates any implied or express warranty of merchantability, any implied or express warranty of fitness for a particular purpose, and any implied or express warranty of conformity to models or samples of materials.
Certain warranties are automatic or implied unless they are specifically disclaimed in a written agreement. To avoid the possibility of providing an implied warranty, your contracts must include a disclaimer like this in a conspicuous manner. A conspicuous manner means that the disclaimer is set off from the rest of the contract by all capital letters, perhaps bold type, or a different color type. The type cannot be smaller than the surrounding type in the contract.
Implied warranties could include a warranty of title (seller owns the goods, has the right to sell them, no creditor will interfere with buyer's purchase of the goods, and the goods are free from copyright, trademark, or patent claims of third parties), a warranty of merchantability (goods are reasonably fit for the ordinary purposes for which such goods are used, of average, fair-, or medium-grade quality, adequately packaged and labeled, and conform to the affirmations of fact on the label), a warranty of fitness for a particular purpose (seller has reason to know of the purpose for which the goods are bought and knows that the buyer is relying on the skill and judgment of the seller to select the goods) and a warranty arising from course of dealing or trade usage (a court presumes both parties have knowledge of trade custom and presumes that custom is intended to apply to the contract). Although I have described these warranties in terms of goods, they apply equally to services.
Express warranties can be made through promotional material, brochures, proposals, and ads. They can arise through verbal statements and do not have to include words like warranty or guarantee. Generally any affirmation of fact or promise, description of the goods, or use of samples or models by the seller will create an express warranty. The provision above disclaims any express warranty that the goods or services conform to models or samples.
Without this provision, the goods or services provided under the contract will be warranted with the express warranties arising from what your company said or gave the other party and with the implied warranties provided under state law. To reduce the uncertainty that this creates, a warranty disclaimer is common in contracts.
23. Written Modification
This agreement may be amended or modified only by a writing executed by both parties.
This provision means that only a written signed agreement will be enforceable to amend or modify the agreement. Otherwise, for example, one company can say that payment was agreed to be double what the contract states, and it's possible a court could find this alleged verbal modification of the contract enforceable.