Turbo-Charge Your Contracts
Law students may spend an entire year studying them, but contracts are actually pretty simple legal documents that can be broken down into two basic parts. The first part of any contract contains the deal-in other words, the specific terms pertaining to the business aspects of the transaction, the price, what is to be sold or the service to be provided, quantity, delivery dates and so on. The second part of any contract contains the legal boilerplate, or the fine print.
Understandably, most business owners concentrate their efforts on the first part of the contract, because the deal is ultimately what's most important to them. But it's also vital you pay attention to the fine print part of the contract, because that's where you can obtain or lose a competitive edge, regardless of what the deal is.
To boost the performance of your contracts, you need to understand the following fine print sections and why these may be very important to you and your business:
"Force majeure" clauses: Although the name sounds like a bad French movie with subtitles, the force majeure clause is a very important provision. It's actually a legal escape hatch in the event something goes wrong with the contract.
Typical boilerplate or fine print language in a force majeure clause allows the other party to the contract to walk away from their contractual duties to you in the event of "acts of God, fire, windstorm, flood, explosion, collapse of structures, riot, war, labor disputes, delays or restrictions by governmental bodies, inability to obtain or use necessary materials, or any cause beyond the reasonable control of such party." Note: Sometimes contracts don't use the actual phrase "force majeure," but instead use similar legal language to excuse contract performance.
Adding a force majeure clause to your contract provides a huge loophole to legally excuse contract performance. But, like anything else, the force majeure clause can cut both ways.
If your business is the one that has to perform most of the duties under the contract, then adding a force majeure clause gives your business a huge escape hatch in the event that something outside of your control prevents your business from fulfilling all the duties and responsibilities in the contract. Similarly, when you don't have significant duties to perform in a contract (other than paying money), then deleting a force majeure clause gives your business more legal rights to enforce the contract if the other party fails to live up to its end of the contract.
Applicable law clauses: This clause may win an award for "Most Uninteresting Legal Boilerplate." But the applicable law clause (sometimes known as the choice of law clause) can be a very important part of any contract, particularly if the other party is located in another state.
In its most basic form, the applicable law clause states, for example: "This contract shall be governed by and construed under the laws of the State of New York." The effect of this clause is to bind you and the other party in the contract to follow the law of the state of New York. This may not sound like a big deal, because the laws of various states are similar in many respects. But a smart business owner never assumes that the law of New York will be exactly the same in all respects as the law of Missouri, for example. If at all possible, you should want to have your own state's law be the applicable law, for at least three reasons:
First, you're almost always more familiar and comfortable with the laws of your own state than with those of another state. Second, it eliminates the possibility that you need to hire a lawyer who practices in the other state to review the contract for your business. Finally, it can cut down on nasty surprises due to variations in state laws if you have to go to court.
While obtaining the best deal is still the primary goal in any contract negotiation, always remember to legally and legitimately turbo-charge any contract in your favor by paying close attention to the legal boilerplate.
Note: The information in this column is provided by the author, not Entrepreneur.com. All answers are general in nature, not legal advice and not warranted or guaranteed. Readers are cautioned not to rely on this information. Because laws change over time and in different jurisdictions, it is imperative that you consult an attorney in your area regarding legal matters and an accountant regarding tax matters.