As a businessperson, you are likely faced with multiple contract issues on a daily basis. The more contracts you read, the more numb you can become to the words endlessly flowing down, page after page. It’s easy to become complacent about the provisions in each contract, especially if you have not faced a breach of contract action. Even business and commercial lawyers can start glazing over after too many hours going over contract provisions. This can be highly detrimental to your business.
If you’ve been in business long enough, you likely have a series of staple contract provisions that you include in every contract. That is a smart move. no sense in reinventing the wheel. However, these staples should be reviewed periodically to ensure your business model has not outgrown them or that the laws haven’t changed. Additionally, there are certain provisions that need customization and careful attention. We’ve identified the top five things you need to consider when drafting or reviewing any contract document.
- Identify Key RisksBusiness contracts are all about balancing potential risks with potential benefits. For each contract you enter into, think carefully about the risks that might occur if things start to go sour between you and your contracting partner. Typical risks may include:
- “It’s not you, it’s me…” – people break up all the time, whether it’s a romantic relationship or an economic one. Sometimes we’re just better off without that other person. If faced with this type of economic breach, ask yourself: what does that risk look like and how can you mitigate it?
- “You lied to me…” – sometimes parties don’t live up to the promises they make in their contracts. Services aren’t up to par, significant deadlines are missed or some other material breach affects the relationship.
- “I’ve found someone else…” What happens when your contracting partner starts cavorting with one of your competitors?Other risks may involve risks to third parties, such as customers you serve. What happens when your client’s data is breached or your company cannot continue a contract due to the other party’s failure to pay?
- Limit Your LiabilityEvery contract should have provisions to allocate risk between the parties by limiting damages. Some companies choose to limit non-economic damages or strictly prohibit punitive damages. So long as the limiting provisions do not violate public policy, just about anything goes.
- Consider Damages CapsDepending on the type of contract you are entering into, you might consider capping your damages to the total contract amount, or some other amount that makes sense given the transaction, yet does not violate public policy.
- Choose Your RemediesWhen looking at your potential risks, consider whether simply suing for breach of contract is sufficient for your needs. Might you also want liquidated damages, termination rights, or injunctive relief? Do you want the other side to pay your litigation fees? What about Jury trials vs. binding arbitration?
- Elect Indemnity Style
Indemnification is one of the most critical provisions in a contract, so review it carefully. There are two general indemnity structures:
- Defend and Pay – the indemnifying party covers the defense or cost of defense, as well as paying damages.
- Insurance Style – makes the indemnified party whole following a breach.
Determine whether all risks warrant indemnification and carve out exceptions as necessary. If there is ever a provision you don’t want to skim over, the indemnity provision is the one.
If you are in need of sound contracting advice, contact Willcox, Buyck & Williams, P.A. today for a consultation.