The failure to draft clear agreements with clients, vendors, partners and employees may expose you to unnecessary litigation risks and costs that can financially impair, if not cause irreversible damage to your enterprise. Regardless of the nature of your business, the following five tips are essential in contract negotiation and drafting.
Put All Agreements in Writing – When you open a business, very often your partners, employees, and first customers are your friends and relatives. Your desire not to offend them by requesting a signed written agreement is human nature and quite understandable. However, a written agreement will not only limit liability exposure for you and your business, but in the long run protect your personal relationships from irreparable damage that can arise from misunderstandings or faulty memories of oral arrangements. While it is tempting to rely on oral assurances from any counterparty, especially friends and relatives, it is imperative that you demand all oral terms be incorporated in the written document. In fact, almost all agreements contain an “Integration Clause” or “Merger Clause”, which provides that the document represents the entire agreement superseding and all prior agreements, discussions and arrangements. If the final agreement is later the subject of a lawsuit, an “Integration Clause” or “Merger Clause” renders the admission into evidence of promises made outside the written agreement an uphill battle.
Beware of Form Agreements – Do Not Skim Over Any Clause – Entrepreneurs, in an effort to save on legal fees, often memorialize transactions in standardized form agreements obtained from commercial sources. Even if your counterparty presents the initial draft agreement, it is often a form document that your counterparty may not have fully understood or even read. If you use a form agreement, be sure to read each clause carefully and consult with an attorney as to any terms you do not understand. Such forms, while sometimes providing a basic framework for certain transactions, will rarely be tailored to your specific needs.
Make All of Your Terms Clear and Explicit - The best contracts contain clear terms, are unambiguous and not subject to more than one interpretation. If the meaning of any word is unclear on its face, explicitly define it so there is no room misunderstanding. Set forth in as much detail as possible price, quantity, deadlines, extension of credit, what constitutes performance, what constitutes breach, remedies, notice requirements, and all other applicable terms. While courts regularly construe vague, unclear and ambiguous terms against the drafter of the document, litigation is not the time to test the meaning of a contract. Taking the time to clearly set forth all terms at the outset avoids not only litigation, but informal disputes with clients and vendors that may irreparably harm the relationship and make them unwilling to do business with you in the future.
Plan Ahead – Include Contingencies Addressing Foreseeable Problems – While all parties anticipate the other’s good faith and ability to perform the agreement, the contract negotiation is the best, if not only, time to address potential problems. For example, Hurricane Sandy rendered it impossible for numerous businesses to operate and serve their clients for weeks, if not months. Even businesses that did not sustain physical damage were substantially impacted by electrical power outages, lost Internet and telecommunication access, and infrastructure rendered impassable by the storm. Do your agreements include a clause addressing impossibility of performance because of a natural disaster, terrorist attack, or some other event outside of your control? Does your agreement provide you with time to perform if such an event renders performance temporarily impossible? Addressing these and other contingencies with your counterparty at the outset can protect against a breach of contract claim.
Never Accept as an Explanation: “Don’t Worry, It’s Just Boilerplate” - You may find yourself reviewing a draft agreement where several of its clauses, especially near the end of the document, come across as mere legalese. These clauses are commonly referred to as “standard” or “boilerplate”, but they may materially impact your rights and obligations, as well as your ability to enforce the agreement. Boilerplate clauses may set forth, among other things:
- Choice of law;
- Which jurisdiction or court may hear claims arising under the contract;
- Whether any dispute is subject to mandatory arbitration;
- Protocols for subsequent amendments to the agreement;
- Liability for attorney’s fees and other costs in the event of breach or claims arising under the contract;
- “Indemnification Clause” in which one party agrees to indemnify, pay or be responsible for any damages for torts or claims made by a third party against the counterparty;
- “Integration Clause” or “Merger Clause”, as discussed above; and
- “Severability Clause”, which deems the rest of the contract enforceable in the event that any clause or clause is found by a court to be invalid, illegal or unenforceable.
Bear in mind that if the counterparty or its counsel has prepared the initial draft agreement, you should presume that any boilerplate clauses are drafted in the counterparty’s favor and shift risk to you. For example, your counterparty may be headquartered in Pennsylvania, is comfortable with Pennsylvania’s courts, and as a result includes a clause subjecting you to that state’s jurisdiction and law. Although another jurisdiction’s law might not be materially different than New York law as it relates to contract claims, you should never presume so without consulting an attorney. You should further consider the added expense and travel time in litigating in another jurisdiction. A second common risky boilerplate clause is mandatory arbitration of disputes arising under the contract. While the protocols of arbitration vary across jurisdictions, and can sometimes be negotiated between the parties, each party typically bears its own costs, waives a right to jury trial, and has very limited recourse to the courts for appealing unfavorable outcomes.
Regardless of the nature of the clause, you should consult with an attorney as to terms you find vague, ambiguous, or unfairly burdensome. Even if you are not represented by counsel, always attempt to negotiate the wording of any clause that is unclear or objectionable. Some counterparties, particularly large companies, will represent at the outset that certain clauses are non-negotiable and insist that identical terms are included in all of its contracts. However, even with seemingly little leverage, you may gain certain concessions, if you make concessions of your own. If the counterparty ultimately indicates that refusal to agree to a specific clause is a deal-breaker, you should carefully weigh the benefits of the transaction against the potential risk arising from the objectionable clause.
We invite you to contact the attorneys at F&S to assist you in further evaluating these and other considerations as they relate to your specific agreements.