Contractual agreements come in all shapes and sizes. The following is overview of topics, clauses, and issues that one should be aware of when entering into or drafting a contractual agreement.
Parties – Are the correct parties identified? On occasion, a party to a contract is incorrectly identified by its common name or a dba as opposed to the actual party to be bound.
Effective Date – On occasion, the effective date of the contract will be different than the date it is signed. If that is the case it should be so reflected in the preamble.
Definitions – In complex legal contracts it is often advisable to define multiple terms. An example is a contract pertaining to the conveyance of real property. In lieu of describing the property by its legal description each time, the preferred approach is to identify the property as a defined term, for example “Real Estate” or “the Property”. This approach is advisable for any term that will be found repetitively throughout the contract.
Term and Termination – This clause should set forth the length of the time that a commercial agreement will last. It should also identify the rights of one or both parties to terminate the agreement and the method whereby the agreement will terminate. It is important to note that there is often found in contracts an “Evergreen” clause which essentially says the contract shall automatically renew for one year, or three years or some similar term. An Evergreen clause should be scrutinized closely, and of equal importance, a calendar system must be in place to calendar the deadline for termination. Obviously, contracts that can be terminated for convenience allow either party to end the agreement typically upon 30 days written notice.
Price – Price can be fixed for the duration, based on a formula, vary according to specifically identified factors, variable so that it is adjusted to reflect change in costs or other market forces and may include variable costs such as shipping and materials.
Payment – This clause should identify when payment is due, what are the invoicing requirements, what is the invoice dispute resolution process, and include verbiage protecting the recipient of payment from late or nonpayment.
Representations and warranties – It is within this section of the contract that the parties allocate risks between themselves. It is here that the risk of nonperformance can be shifted from one party to the other. It is also in this representations and warranties section that the recipient of a representation is able to create a contract claim or cause of action against the party making the representation. Furthermore, representations and warranties serve as the basis for indemnification obligations.
Indemnification – Typically it is in this section that one party agrees to compensate another party for agreed costs and expenses. You will frequently find in the indemnification section verbiage where one party agrees to defend and hold the other party harmless from any lawsuit filed against it. Usually that clause will be mutual or there will be a clause that says in the event of a breach of contract the losing party has to pay the legal fees and court costs to the party who prevails.
Choice of law – Contracts tendered by vendors invariably specify that venue will be where the vendor does business and the governing law of the vendor’s state will control. Therefore, if a Kentucky business enters into a contract with a California vendor and that verbiage is included the ramifications can be significant. Those clauses are best avoided if possible but that is not always something that can be negotiated.
Amendments – Invariably any Amendments have to be in writing.
Confidentiality – This is obviously a significant topic in today’s environment. Typically, both parties to a contract will agree to protect the confidentiality of personally identifiable information. The breaching party is typically obligated to indemnify the non-breaching party in the event of the disclosure of confidential information.
Insurance – Another very important clause when dealing with tangible products that are subject to loss. Who bears the risk of loss and who is obligated to insure the property in question should be delineated in the contract?
Force Majeure – This clause has received vast amounts of attention due to the COVID-19 virus. Essentially it allows the entity obligated to perform the contract to escape from that obligation if performance is impractical or impossible. Obviously whether performance is impractical or impossible is often subject to differing interpretations. Nevertheless, there exists a line of thought that the ramifications of the COVID-19 virus are a good example of what a force majeure clause is historically intended to cover.