I recently had the privilege of leading a roundtable discussion for the Baltimore/Washington, D.C. Chapter of SMEI on the topic of business contracts. Let’s face it, discussions on contracts rarely are “sexy,” and the mere mention of the word “contract” usually incites reactions along the lines of eye rolling, yawning, and frequent excursions to the office coffee machine. Notwithstanding the apparent *yawn* factor of the topic on which I was directed to speak, the simple fact is this: contracts can make or break a business. They are important. And all businesses do contract, whether it be with their own employees or with other businesses.
So, in thinking about how to lead a discussion on business contracts, my goal became clear: Tell businesspeople what their contracts needed to have to reduce the chance that they’d wind up in litigation. And more importantly, present this knowledge in clear, easy to understand, non-lawyer terms. Inspired by David Letterman’s Famous Top Ten Lists, I set out to make my own list of essential business contract terms. After all, having litigated numerous contract disputes, I can speak definitively on what all business contracts should include. So, without further adieu, and in no particular order, here’s my Top Twenty “Must Haves” for Business Contracts:
TOP TWENTY “MUST HAVES” FOR BUSINESS CONTRACTS
1. Put it in WRITING. It seems simple, doesn’t it? But, you’d be surprised to find out how many business deals are done via the “hand shake.” The simple fact is this: you’ll have less to dispute if it’s clear, concise and in writing. In addition, some contracts (i.e. real estate, contracts for more than one year, etc.) are not enforceable if those contracts aren’t in writing.
2. Speak English! Nobody but lawyers seems to understand words like “hereinafter” and “aforesaid.” And I’m not sure lawyers even understand those words (my theory: lawyers use words like that because lawyers just really like to sound lawyerly). The bottom line is this: Drafting a contract isn’t some mystical art. You DON’T have to be a lawyer to craft a contract. Keep it simple. Use simple headings and simple terms. State precisely the terms to which you’re agreeing.
3. WHO are you? Are you contracting with a person or a company? If the answer is company, then don’t waste time contracting with someone who has no authority to bind said company to a contract. If I’m talking with Facebook, about a business deal, then I’m not going to rely on a help desk person’s assurances that everything’s a “go” when the decisions are made by someone with a little more authority…say like, Mark Zuckerberg (or presumably someone he’s put in a bona fide position to make decisions for the company). If you’re not sure who has the authority to bind a business, then ask.
4. Wait!….Who are YOU again? A business’ legal name may be different than the name it’s using to conduct business. A trade name is not a legal entity. Legal entities own trade names, and it is the entity that must be bound to a contract. Simply put, when things go wrong you can’t sue something that doesn’t legally exist. If you’re unsure of the exact business entity with whom you’re contracting, you can easily find this information. For example, in Maryland, just check the Maryland State Department of Assessments and Taxation website and click on Business Information.
5. How much is this going to cost me? Unless you’re doing something for free, every contract has payment terms. Is it a lump sum payment, or are the payments in installments? Spell it out. Be clear, concise, and simple. If you’re going to charge interest or late fees if payments are not on time, then you MUST put those terms in the contract.
6. The Devil is in the details. Any contract should state the rights and obligations of each party. When does the contract start and when is it completed? What are the specific payment terms? What’s the precise criteria by which you consider your contract completed? More importantly, the contract should have a line that clearly states that the written agreement is the complete agreement between the parties.
7. ‘Til death do us part? Are you stuck in this contract forever? When does it terminate? How can you terminate it? The parties need to agree on circumstances that terminate the contract and specify it in a “Termination” clause. Make it definitive. For instance, if a party misses deadlines or fails to make a payment, the other party should have the right to terminate the contract without breaching the parties’ agreement. Specify precisely when, how, why (the reasons or no reason at all), and by whom the contract can be terminated.
8. There’s no place like home! Pick a state law to govern the contract. Commonly called “choice of law provisions,” you can specify under which state’s laws you agree to litigate. This is especially important if you’re in one state and the other party is in another. Additionally, your state’s laws may be more favorable to your business than the other party’s state laws.
8a. There’s no place like home! Part two Pick a venue where you’d like disputes to be resolved. Some courts are more favorable than others. Sometimes, it’s a matter of convenience. That is, you want to make things as easy for yourself as possible if the contract goes awry. If you want any lawsuits arising from the contract to be litigated in the Circuit Court for Frederick County, Maryland, then specify it.
9. Houston, we have a problem. Specify how disputes arising from the contract are going to be resolved. Do you want to arbitrate the dispute (personally, I’m not a fan of arbitration, but that’s just me)? Do you want to require the parties to mediate before bringing litigation? If you want disputes sorted in a certain way, then your contract must clearly state it.
10. Speak with my lawyer! If you want to recover your attorneys’ fees, then you’d better say so in your contract. Let’s face it, attorneys litigate for a living. They make their money in fees, and attorneys’ fees aren’t cheap. If you have a dispute arising from your contract, and you litigate and prevail in that dispute, you do not automatically recover the thousands of dollars you’ve spent out-of-pocket in attorneys’ fees. In Maryland, for a person/business to recover attorneys’ fees arising from the enforcement of a contract and/or a contract dispute, your contract MUST have an express provision stating so. Without an attorneys’ fees clause, you’re not getting reimbursement of those fees.
11. It’s the end of the world as we know it. What happens if your business goes up in flames, literally, and you lose the work product you promised to the other party to your contract? Are you still required to perform under the contract? Well, no, not if you have what’s commonly called a “force majeure” clause. A “force majeure” clause may get you “off the hook” so-to-speak in the event of some unforeseen catastrophic event, like a fire, flood, explosion, war, government embargo, or an Act of God beyond the parties’ control. This clause should be specific in notice requirements and it should state certain catastrophic events applicable to your particular business.
12. That’s all, folks!!!! An “Integration Clause” is a very important provision to have in all contracts. Simply speaking, what you have in writing signed by both parties should be the parties’ final agreement. An integration clause takes the guesswork out of what the parties intended the contract to be. Thus, with an integration clause, it doesn’t matter if you have twelve e-mails reflecting twelve different things. The final contract supersedes any previous agreements, negotiations, promises or understandings between the parties. If your contract relies on schematics, blueprints or other proposals or statements relating to the work involved, and you want those documents made part of the written agreement, expressly incorporate by reference those additional documents in your contract.
13. Well, don’t blame ME. An “indemnity” clause addresses the risk that your company might be liable for damages resulting from something the other party does related to the agreement. What this means is, the other party will “hold you harmless” from that risk. If you have an indemnification clause and suit is brought against you, the other party…the party indemnifying you (the indemnified party)…will pay your damages, claims, attorneys’ fees and so forth if litigation arises as a result of the indemnifying party’s actions relating to the contract. If this provision were not in your contract, you might find yourself in litigation with the other party to your contract to recover the damages and costs you incurred to defend any lawsuit brought against you by someone else.
14. Have your people contact my people. A “notice” provision is important to any contract. How are the parties to contact each other in the event of a breach, when termination of the contract is desired, when amendments are to be made, or in any other situation? A notice provision sets forth the requirements by which the parties give legally valid notice. It typically contains a contact person for the party, the address at which the party would like to be contacted, and how that notice is to be delivered, i.e. certified mail, return receipt requested.
15. One bad apple doesn’t spoil the bunch. Make sure your contract contains what’s called a “severability” provision. Severability provisions usually look like this: “If any provision of this agreement shall be declared by any court of competent jurisdiction to be illegal, void, or unenforceable, the other provisions of this contract shall not be affected and shall remain in full force and effect.” Basically, you don’t want a whole contract to be declared null and void in the event that one provision is no longer legal (yes, the law changes from time to time) and enforceable.
16. I will survive! When your contract ends, the provisions typically are no longer effective. Sometimes, though, you don’t want the contract to end completely. What happens if the other party is sued in connection with the contract after your agreement with that party is terminated? You STILL want that indemnification clause to be in effect, don’t you? Thus, it is important for your contract to have what’s called a “Survival” provision. The Survival provision allows provisions that govern the parties’ agreement, i.e. Choice of Law, Indemnification, Attorneys’ Fees, to remain in effect after the agreement ends.
17. Here, you take it. An “Assignment” Clause controls whether either party is able to assign its rights and obligations under the contract to someone else. For example, if your company was sold, your company could assign the contract to the new owner. Sometimes, however, you don’t want to allow a contract to be assigned without your consent. Say you contract with a party, and unbeknownst to you that party assigns its duties under the contract to someone else…the next thing you know, you could be dealing with a company with whom you don’t want to work. Contract assignments can be both good things and bad things, so you want to make sure you’re able to control how and when those assignments are made. In my experience, I always include an assignment clause which looks something like this: “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.”
18. I surrender! What happens when one party fails to insist on strict compliance with any of the terms of a contract agreement? An example of this would be your decision not to pursue late fees and interest if payment under the contract is untimely. At some point, you may want find yourself wanting to collect interest and late fees. If you didn’t enforce that provision once, have you lost the right to enforce that provision forever? Not if you have what’s known as a “Waiver” provision. A Waiver provision protects you from losing your right to enforce provisions of a contract, even if you have not been strict in enforcing those provisions in the past. If you don’t have a waiver clause, your company risks having a court find that, because you waived any of the contract’s terms, those terms are no longer enforceable. A waiver clause usually looks like this: “Failure of either party to insist on strict compliance with any of the terms or conditions of this agreement shall not be deemed a waiver of such terms.”
19. I fought the law, and the law won! Your contract should have a clause requiring each party to comply with all applicable laws, ordinances, regulations or other requirements in connection with its duties and obligations under the contract. Although it seems simple, this clause makes one party’s failure to comply with the law a breach of contract. You don’t want the other company’s violation of a law to have a negative effect on your business and you want to give yourself an “out” if that happens.
20. Ch-ch-ch-changes! What if circumstances arise where you find yourself wanting to amend or modify a contract? Things happen. They do. But you also want to protect yourself. Every contract should have what’s called a “Written Modification” term which means that only a written agreement, signed by both parties, will be enforceable to amend or modify the contract. Without this clause, the parties could potentially find themselves disagreeing on what was changed when. Like the contract itself, you want all amendments or changes to be as clear as possible and written in stone as well.
Keep in mind, depending on your business, your contract may need to include other essential clauses. Are you employing someone as an employee, or are you hiring someone to do something as an independent contractor? In these situations, it is important to define the exact nature of the relationship you have with the other party. Another example occurs when your contract involves the disclosure of sensitive proprietary business information or trade secrets. You certainly don’t want that sensitive information being disseminated just to anyone; therefore, you definitely want your contract to have a Confidentiality clause. In addition, it is not unusual for business contracts to contain other provisions such as Warranty Disclaimers and or Insurance clauses as well.
In closing, it would be prudent for any business to have an attorney review and approve its business contracts. The money spent on an attorney at the beginning of the contract process could save you or your business thousands of dollars later in the event a dispute arises from your contract and you are forced to litigate. In my work, I’ve litigated too many contracts where litigation would have been avoided if the contract had been constructed properly and reviewed by an attorney before being signed.
That being said, a little knowledge ahead of time goes a long way in protecting your company from the risks of lawsuits arising from business contracts. Knowing what you want and need in your business contracts makes it easier to discuss these issues with your attorney and undertake a collaborative approach toward drafting your business contracts and solving your business problems.