I am frequently asked by my small business clients to help them remedy a wrong that has occurred in connection with a business deal that went wrong – things such as lack of payment, faulty products, failure to comply with specifications, late delivery of products or services, etc. After hearing the facts, my first question is almost always – what does your contract say?
Too often, however, my business owner clients fail to properly review their contracts and negotiate favorable terms before signing. Contracts are usually ambiguous and do not consider the myriad of issues that may arise, leaving you unprotected and without the ability to address the other’s wrongdoing.
There are some major issues that business owners should consider and negotiate properly before signing any contracts. Below are some of the major considerations and issues that are most frequently litigated in contract disputes.
- Clear and Specific Terms: Too often, the contracts I review do not clearly delineate the obligations of each party. For instance, if one party is providing consulting services to the other, those consulting services should be clearly defined, often on an exhibit attached. Address things such as what personnel is/are responsible for providing the services, how much time must they devote to the project, how often are the parties communicating on strategies, etc. Or if you are purchasing a product – what are the standards or specifications for those products, when should it be delivered and in what condition, who is responsible for losses or damages to the product while in delivery?Clearly define the rights, obligations, and responsibilities of each party involved. Ensure that terms that are used throughout the contract are defined accurately and used consistently.
- Payment Terms and Pricing: Clearly outline the payment terms, including the amount, due dates, and any applicable penalties or discounts. Outline pricing structure and any potential price adjustments accurately and with specificity. Consider things such as: grace periods, late fees, interest on late payments, the rights of one party to deduct from what it owes amounts the other party owes to it (rights of set-off), circumstances under which pricing may be adjusted (if any).
- Performance and Deliverables: Define the expectations for performance and deliverables, including quality standards, timelines, and milestones. Specify what constitutes satisfactory completion of the work or delivery of the product/service.For service contracts or consulting arrangements – is it a best-effort standard? Or is there an industry standard that should be applied? Is the vendor/consultant required to spend a certain number of hours per week? Are there periodic reporting requirements? Does the vendor need to provide a timesheet?For the delivery of goods – what are the required quality of those goods? Are there warranties and if so, for how long? What is the timing for delivery?
- Intellectual Property Rights: Address ownership of and usage rights for intellectual property created, licensed, or shared during the contract. Clearly define who owns the intellectual property and how it can be used. If one party is licensing to the other, the licensor should clearly delineate terms of and restrictions on usage and should give representations that it owns the intellectual property and has registered its rights as a trademark copyright, etc. Each party should be indemnified for actions of the other that might have infringed on the intellectual property rights of third parties.
- Confidentiality and Non-Disclosure: Include provisions to protect confidential information shared during the contract. Specify the obligations of both parties to maintain confidentiality and the consequences of any breaches.
- Termination and Renewal: Outline the procedures for terminating or renewing the contract and when and how each party may do so, including notice periods and any applicable termination fees. Think of issues such as when you may want the right to terminate or to disallow the other party from renewing (e.g., the other party has not met its standards for delivery or performance, events of default, circumstances that may cause you reputational risk or other damages).
- Defaults and Remedies: Define in specificity what are the circumstances that result in a default (payment defaults, performance defaults, bankruptcy, inaccuracy of representations, etc.) and whether and under what circumstances the defaulting party may cure its default.Once a default has occurred, what are the non-defaulting party’s remedies – termination; recover damages; right to sue for specific performance; the right to accelerate payments that would have been due under the remainder of the contract; the right to repossess property that was delivered but not paid for; rights of set-off?
- Limitation of Liability: Often, I get a call from a client who has suffered losses due to other party’s failure to perform, but unfortunately the contract limits the liability of the other party. Such a clause will typically be in all CAPS and will state that the other party is not liable for damages or that consequential and compensatory damages are not allowed or that damages are limited to the amount paid under the contract.Before agreeing to such a provision, consider whether you can live with such a clause and discuss with an attorney exactly what such a clause means and what your options are for negotiating a more favorable clause.
- Indemnification: When contracting with another party, there are many ways that party can cause you liability from a third party. For instance, if you are a tenant in a shopping center and the landlord does not keep the common areas in the shopping center in good repair causing someone injury, you might be unfairly brought into a lawsuit and must defend yourself, even though you had nothing to do with the third-party damage. Or, as discussed above, you may have licensed intellectual property from someone, but if that person does not actually own that intellectual property, you may be sued for intellectual property infringement.This is why it is important to draft an indemnification clause that requires the other party to defend you and hold you harmless from its negligent and intentional acts and omissions, failure to comply with laws, breach of the contract, breaches of representations and warranties, etc. Such an indemnification clause should require the payment or reimbursement of your expenses including the costs of the lawsuit and attorney’s fees.It is important that such a clause is drafted properly by an attorney that knows how.
- Dispute Resolution: Include a clause that outlines the preferred method of resolving disputes, such as negotiation, mediation, or arbitration. Specify the jurisdiction and governing law for resolving disputes.
- Force Majeure: Address unforeseen circumstances that may prevent or delay the performance of the contract, such as natural disasters or acts of God. Include a force majeure clause that outlines the rights and obligations of the parties in such situations. Such clauses were intensely litigated after COVID and have become increasingly important to review and draft properly. The way various states interpret such clauses will differ so, again, it is important to consult with counsel.
- Governing Law and Jurisdiction: Specify the governing law that will apply to the contract and the jurisdiction where any disputes will be resolved. This is particularly important when dealing with contracts with a party from another state or international contracts.
While the above list and the questions I ask are designed to help you spot issues that must be considered in your contract review, they are not exhaustive. It is important for business owners to consult with legal professionals to ensure that contracts address these major issues and are tailored to their specific needs and circumstances.
By conducting a comprehensive review and engaging in negotiation, you can mitigate risks, clarify terms, and safeguard your interests. Better to carefully review your contract with qualified counsel up front than to suffer the damages and frustration of a poorly drafted contract later.
Val DiGiorgio of Omnis Law Group, is an experienced Contracts attorney. Val can be reached at VFD@Omnislawgroup.com, you can contact the firm online, or call 484-81-OMNIS to set up an initial consultation.