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A Summary of Essential Contract Terms – Part 2

Hopefully you have read our blog titled “A Summary of Essential Contract Terms – Part 1.” This blog is a continuation of the questions that should be asked while negotiating and drafting every contract:

How will notices be given?

It is important to require all notices to be given in writing and set forth how they should be delivered (personally, U.S. mail, certified mail, overnight delivery service, etc.). The contract should also specify the address where each party will be served with a notice. You should also identify when the notice shall be deemed to have been received, especially if a certain time period starts upon delivery of the notice.

What is the relationship of the parties?

Depending upon the type of contract, it is important to identify the relationship being established between the parties. For example, is one of the parties an independent contractor or an employee? Does the agreement establish a joint venture, partnership, agency or other association between the parties? Does the contract confer power or authority from one party to the other?

Is the contract severable?

If one portion of the contract is declared by a court to be unenforceable, does the remainder of the contract remain in full force and effect? This type of provision is particularly important in non-compete and non-solicitation agreements.

Can the contract be assigned?

Most contracts specify whether the agreement is binding on and inure to the benefit of the parties and their successors and assigns. As a general rule, however, a contract is only binding on the parties that signed it. However, if a company is sold, you want to ensure that the agreement is binding on the new owners.

Will certain contract clauses survive termination?

When a contract is terminated, it means that it is no longer effective or binding. However, there are certain provisions that you may want to continue to be effective such as confidentiality, indemnification, or limitation of liability clauses.

How can the contract be terminated?

Most contracts provide that they can be terminated “for cause” or “without cause.” This provision should set forth what constitutes cause and the notification requirements, as well as any time period in which the breaching party can cure. If a party is allowed to terminate the contract for convenience, notification requirements should be detailed in the contract.

Does failure to enforce constitute waiver?

Most contracts provide that the failure of either party to strictly enforce the terms or conditions of the contract do not constitute a waiver of such terms or conditions.

Are there any warranties being made?

If warranties are made, they should be clearly identified in the contract. Further, a provision should be included stating that unless expressly stated in the contract, the seller disclaims and makes no other implied or express warranties.

Can the contract be modified?

It is wise to include a clause that states the contract can only be amended or modified in a writing that is signed by both parties.

To learn more about essential contract terms or how we can assist you with other business-related matters, contact Leslie S. Marell today.

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A Summary of Essential Contract Terms – Part 1

Every industry and type of business requires its own unique contracts. However, there are certain essential terms that should be included in most every contract. Below is a simple summary of several questions you should ask in determining what types of clauses you need in your agreements.

Should the contract be assignable?

Most parties do not want the other party to have the right to assign or subcontract any part of its obligations under the contract without obtaining express consent. It is important to understand that unless expressly prohibited in the agreement, a contract is presumed to be assignable.

Who is liable to pay attorney’s fees?

Typically, a non-prevailing party is required to pay the lawyer’s fees and costs incurred by the prevailing party. In some states, there is a law that allows the prevailing party in a lawsuit to recover its attorney’s fees, but it is wise to have this type of provision in your agreement to ensure you are protected. Additionally, the law may limit your recover to the expenses associated with a lawsuit while the contract clause can allow recovery in a dispute.

What law will govern the contract?

You should select the law of a specified state to govern your contract. The state law you choose should have some relationship to the contract or the parties involved. Most parties select the state where their home office is located because they are familiar with them and already have attorneys representing their best interests in the state. You should also state your choice of venue for where lawsuits pertaining to the contract should be filed.

What happens if the agreement has conflicting terms?

Hopefully your primary document does not conflict with itself, but if it incorporates other contracts or documents, it is possible a conflict can occur. Thus, you should have a provision that sets forth how such a conflict will be handled. In other words, the contract will state which document will have priority over the other.

Are there exclusive or cumulative remedies?

If the contract outlines specific rights and remedies, it should state whether they are exclusive or cumulative with other rights and remedies.

What if breach is caused by events out of the party’s control?

Most contracts provide that neither party can be held liable for a delay or other failure in performance caused by fire, flood, war, or other similar causes beyond the party’s control. This clause should be fair in listing the catastrophic events that may be applicable to the business, the time frame for providing notice of the unforeseen event should be reasonable, and the time period giving rise to the right to terminate should be fair to both parties.

Is there are right to indemnification?

If one party agrees to indemnify or hold the other party harmless from all claims or actions arising out of the indemnifying party’s acts or omissions, it should be clearly stated in the contract. For more information, please read our blog titled “Indemnification Clauses.”

How will insurance be handled?

Depending on the type of transaction, it may be necessary to outline how insurance will be handled. Each party may agree to maintain insurance in commercially reasonable amounts to protect itself and the other party for damage to property or personal injury that may arise under the contract.

For more information on questions you should ask when negotiating and drafting a contract, be sure to read our next blog. If you have additional questions, contact Leslie S. Marell to schedule an appointment. Our office is located in Torrance, California, but we proudly serve businesses of all sizes from all over the country.

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Don’t Make Assumptions In Your Outsourcing Contracts

It is a common mistake for users to enter into an outsourcing contract with the assumption that they will automatically be given new or updated technology during the life of the agreement. Unfortunately, unless this is specifically stated in the outsourcing contract, the supplier is not obligated to provide you with upgraded equipment. This can be problematic since advances in technology occur quite quickly.

If you are in a situation where your contract does not require the supplier to provide upgrades, there may still be hope. For example, if the supplier is failing to meet certain terms and conditions in the contract, there is likely a provision that works in your favor. Don’t give up hope without having an attorney review your outsourcing contract to determine if you have leverage for a renegotiation of the contract terms.

Advances in technology occurring at a fast rate also make it important for you to have exit rights in your contract. However, you must consider that an abrupt termination of the contract could be devastating to your business if you don’t have services during the transition period. Thus, you must create transfer agreements or ensure that alternative arrangements have been made.

The most effective thing you can do to protect yourself in outsourcing agreements is to obtain legal counsel early in the process. This is particularly important if the supplier is not being cooperative. A knowledgeable attorney will have subtle ways of negotiating your rights that the supplier will find agreeable. For example, the agreement may allow you the right to conduct an audit which could result in improvements by the supplier.

When negotiating and drafting an outsourcing contract, the value of obtaining professional advice is clear. The user has the most leverage during the negotiation process, so it is important to take advantage of it. Once the agreement has been signed and you are “locked in,” the power shifts to the supplier.

If you need assistance creating an outsourcing agreement or you have questions regarding your company’s contractual needs, contact Leslie S. Marell for help. We serve as general counsel to clients who do not require, or choose not to employ, a full-time lawyer in-house. Call today to schedule your initial consultation.

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Understanding Common Contractual Clauses

While every contract is unique, a typical business contract contains some basic or “boilerplate” provisions. These clauses usually follow a standard format and they are carefully worded to ensure they will hold-up in court. Because so many contracts contain similar boilerplate provisions, many people do not read them or do not understand what they are agreeing to.

Below are a few examples of legal terms and conditions that you should fully read and understand before signing the contract. The consequences of ignoring these clauses could lead to an unintentional breach of the contract and/or litigation.

Merger and Integration Clause

This clause is often referred to as the “entire agreement clause” because it provides that the entire agreement between the two parties is what is laid out in the written contract. This is a very important provision to understand because it makes it extremely difficult for the parties to enforce any promises that are not documented in the contract, even if they were sent in writing or via email prior to contract signing. The court will look only within the four corners of the contract to resolve a dispute. Thus, it is imperative that all prior agreements are fully recorded in the written contract, leaving no ambiguity.

Indemnification Clause

The indemnification clause is a tool designed to protect one party from certain actions or negligence of the other party. In other words, this provision can protect you from misconduct or wrongdoing that you are not involved with. This type of protection is extremely important when there are contractors and subcontractors involved with performing the work. To learn more about indemnification, please read our blog titled “Resolving the issue of Limitation of Liabilities between Buyer and Seller.”

Time is of the Essence Clause

If your contract deals with a time-sensitive matter, you must include a clause the dictates failure to meet a specific deadline is considered a breach of the contract. The clause can outline the consequences or damages available to the non-breaching party for failure to meet the deadline.

Severability Clause

A severability clause provides that if a portion of the contract is held to be void or unenforceable, the remainder of the agreement can still be valid. Without this provision, the entire contract could be unenforceable if any part of it is void.

Liquidated Damages Clause

A liquidated damages clause provides that if a party breaches certain terms of the agreement (often delivery or performance requirements), they will be required to pay the other party a certain amount of money as compensation for the damages. Liquidated damages can be helpful when it is hard to calculate the actual damage that will be incurred by the non-breaching party.

Acceleration Clause

The inclusion of an acceleration clause allows a party to demand performance in full if the other party breaches the contract. For example, if one party misses a payment, the other party can demand payment in full.

The Takeaway

The above are just a few examples of the boilerplate language that can be included in a contract. Failing to read these clauses and to fully understand what you are signing can put your business at significant risk and make it vulnerable to a lawsuit. Remember, every clause in a contract is negotiable, so don’t think you are “stuck” with the boilerplate clauses. If you don’t understand any part of an agreement, it is imperative that you have a competent business attorney review it.

To learn more about boilerplate language in a contract or how we can assist you with other business-related matters, contact Leslie S. Marell today.