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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.