Contractual agreements come in all shapes and sizes. Whether drafting or entering a contract, what you don't know can hurt you. Here's an overview of the topics, clauses, and issues you should know and keep in mind.
The preamble is the introductory portion of the contract. These paragraphs set the stage for the entire agreement. They introduce the parties, define legal terms, note the date the contract becomes effective, and provide information on how long the agreement will last and the rights of one or both parties to end it.
- Parties. Are the correct parties identified? Occasionally, a party to a contract is incorrectly identified by its common name or a dba (doing business as) as opposed to the actual party being bound.
- Effective date. Sometimes the effective date of the contract will be different than the date it is signed. If that is the case, it should be reflected in the preamble.
- Definitions. In complex legal contracts, it is often advisable to define multiple terms. An example is a contract regarding the conveyance of real property. Instead 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 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 contracts often include an “evergreen” clause that 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 schedule 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.
Also known as the body, the operative provisions portion of a contract contains the key terms governing the rights and obligations of the parties entering into the agreement.
- Price. Price can be fixed for the duration, based on a formula, vary according to specifically identified factors, and be variable so that it is adjusted to reflect changes 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, define invoicing requirements and the invoice dispute resolution process, and include verbiage protecting the recipient from late payments or nonpayment.
- Representations and warranties. Within this section of the contract, the parties allocate risks between themselves. Here, the risk of nonperformance can be shifted from one party to the other. In this representations and warranties section, the recipient of a representation can 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, in this section, one party agrees to compensate another party for agreed costs and expenses. The indemnification section often contains verbiage where one party agrees to defend and hold the other party harmless from any lawsuit filed against it. Such clauses are usually mutually agreed upon or include a provision stating that in the event of a breach of contract, the losing party must pay the legal fees and court costs of the party who prevails.
Boilerplate clauses are standard legal clauses found in most commercial contracts. These clauses usually appear at the end of a contractual agreement. Common boilerplate clauses include the following.
- Choice of law. Contracts proposed by vendors invariably include provisions specifying that the venue of any disputes will be where the vendor operates and that the governing law of the vendor's state will apply. If a business based in Kentucky enters into a contract with a vendor based in California and the vendor includes such clauses, the consequences could be significant. Avoiding these clauses is preferable, but negotiating them may not always be possible.
- Amendments. This clause indicates that any changes, corrections, clarifications, or other amendments to the agreement must 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. In the event that confidential information is disclosed, the breaching party is usually obligated to indemnify the other party.
- Insurance. This is 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. It allows the entity obligated to perform the contract to escape that obligation if performance is impractical or impossible. 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 an excellent example of what a force majeure clause is historically intended to cover.