Entering into a new contract is an exciting time for any company. The agreement is signed with the hope that it will grow the business and result in a long, mutually beneficial relationship with the other side. While such optimism is warranted, the importance of entering into a legally sound contract is critical to the protection of your business.
Contract Provisions Checklist
Principal terms, such as pricing, delivery of the particular good or service, and payment terms, are essential. These terms likely will be discussed and resolved during the initial negotiation stage. However, there are also difficult issues that need to be negotiated into the agreement in the event the contract does not perform as expected.
Negotiating the “what ifs” or the pitfalls if the contract goes bad are best addressed at the outset, when the parties are eager to reach an agreement and goodwill is at its highest. Ensuring that the company is adequately protected in the contract can be just as important as securing the contract in the first place. A good contract may not only assist the company in successfully resolving a dispute before it hits the courtroom, but it can also protect the company should litigation ensue.
Here are eight contractual provisions that any company should consider in order to reduce the threat and impact of litigation:
1) Indemnification
In its simplest terms, indemnification is a method of risk allocation and shifts liability from one party onto another. An indemnification clause in a contract can help ensure that the company is not liable for particular losses and/or not liable for damages to a third party.
Indemnification comes in many forms, but at its core, indemnification is a method to shift liability away from the company.
2) Limitation of Liability
This provision limits the types of claims that can be recoverable under a contract. It may also limit a party’s liability to a fixed monetary amount.
3) Insurance
Depending on the type of contract, insurance may play a factor. The company should consider requesting that the other side add the company as an additional insured under an applicable policy of insurance.
In contrast, the other side may request that it be added to your insurance policy. Be sure to check with an insurance broker or other professional when adding another company as an additional insured.
4) Termination Provisions
The termination clause or clauses in a contract should guide the parties on how to legally exit the contract. Often times, termination provisions are given short shrift or ignored entirely. However, the company should proactively and creatively think about potential disputes that can arise under the agreement as a written contract can specifically limit the circumstances under which a party can legally terminate the agreement. Dealing with termination issues at the outset can help avoid headaches down the road.
5) Automatic Renewal
Automatic renewal provisions (or evergreen clauses) provide that a contract automatically renews for a certain period of time unless a party cancels the contract before the automatic renewal date. Evergreen clauses are enforceable in most states.
When entering into a contract that contains an evergreen clause, be sure to calendar the cancellation date in order to avoid having a contract renewed unexpectedly.
6) Default Provisions
There are many ways that a party can default under a contract. The most common reason is failure to pay. Contracts should provide disincentives that discourage a party from defaulting, such as, making the defaulting party responsible for the payment of attorney’s fees and costs, interest, and collection costs incurred by the non-defaulting party to secure performance under the contract.
7) Entire Agreement Clause
Also known as a merger or integration clause, an entire agreement provision declares that the written contract represents the complete and final agreement between the parties. In other words, the written contract supersedes any prior written or oral agreements that the contracting parties might have had before signing the contract.
This type of contractual provision can stop either party from claiming that there were other promises and terms of the agreement that are not written into the contract.
8) Dispute Resolution
The parties should address how disputes will be resolved under the contract, whether by mediation, arbitration, or through litigation. Addressing how disputes will be handled in the written contract can help lower the costs of litigation and mandate where and how disputes will be resolved.
While a good contract can propel a company to new heights, a bad contract can be a long-term burden for the business.
The contract provisions checklist above are just a sampling of any number of provisions that should be contemplated when entering into a written agreement. It is important to remember that each contract and transaction is unique and the above provisions may or may not apply depending on the circumstance.
