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Contract Speak

It's time to cut through the contract legalese. Here are six common contract clauses and how to decipher them.

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Formal legal contracts are often filled with boilerplate--endless paragraphs with indecipherable legalese that protects one side or the other against different risks. Lawyers often say, "The big print giveth, and the fine print taketh away." Because boilerplate can have startling effects on your deal, it pays to have your lawyer negotiate it well. Here are common clauses to look out for:

  • The party-hopping assignment: Deals can be bought or sold--or, in legal jargon, "assigned." Thus, you could shake on it with a person you like and end up doing business with a person you don't like. To prevent the other side from selling your deal, have your lawyer incorporate appropriate verbiage into your contract. Conversely, if you want the right to sell the deal, your lawyer can spell that out, too.
  • The integration clause: The integration or merger clause protects you from a claim that there are other parts to your deal that weren't written down, or that you reached an oral agreement to change the written one. It's usually the last clause in a contract. Here's a simple version: "This agreement contains our entire understanding and cannot be changed orally." It's standard and rarely controversial.
  • Audit clauses: If your deal entitles you to ongoing profit or royalty payments, audit clauses will give you the right to check their accuracy. Frequency of accountings, notices, costs and time limitations are negotiating points.
  • Representations and warranties (R&Ws): If prevarication is the disease, R&Ws are the cure. These make the other side reduce to black and white that which it promises to be true.

R&Ws must be custom-designed for each deal. The more complex the transaction, the more exhaustive the R&Ws and extensive the attendant negotiations. Even though R&Ws flag problems and promote honest discussion, don't let your guard down just because the other side swears everything's OK. In the real world, their dishonesty will become your problem.

  • A notice clause: A notice clause lays out exactly how parties will exchange formal communications, including where, when and how to send them; when they're effective; and so on. They are innocuous until the parties are fighting; then whether notice was "properly" given can become key.
  • Exculpatory clauses: As a general rule, the less you are legally responsible for, the better. Thus, if the other side has the leverage, it will sell you the goods "as is"; have you enter the premises "at your own risk"; and saturate contracts with disclaimers, limitations on liability and indemnities--even placing the obligation on you to buy insurance. It will feel outrageous--until you've got the upper hand and can stick these clauses to someone else.

A speaker and attorney in Los Angeles, Marc Diener is author of Deal Power.