Do your eyes glaze over when you’re reviewing your company’s contracts with its suppliers or customers? If so, you’re not alone. Contracts can be long, dry documents filled with obscure legal language. In short, they’re no fun to read.
But even if you’ve had your contracts drafted by an attorney (which I recommend), there are a few key terms that you should be sure to understand. These terms can affect your liability under the contract long after both parties have performed their obligations:
1. Consideration — An agreement is not an enforceable contract without consideration, i.e. what party A agrees to give up in exchange for a performance by party B. Consideration can be payment (money or other item of value) or performance in return. Without a clear statement of consideration, if the party you are contracting with fails to perform as agreed, you may not have a viable cause of action for breach of contract.
2. Indemnification — With an indemnification clause, one party can agree to take on any liability incurred by the other party in performing under the contract. Make sure you understand which way the indemnity runs and whether it is limited in any way. If you are agreeing in the contract to provide indemnification to the other party for acts they undertake in performing under the contract, you may be liable to the other party if they are found liable to a third party for harm caused performing those acts. Be sure that you are receiving adequate compensation to take on this additional risk.
3. Arbitration — A mandatory arbitration clause requires that any contract disputes be handled by arbitration rather than in the court system. The contract can also designate how the arbitration will proceed, how many arbitrators will be used (usually 1 or 3), and whether discovery will be permitted. Arbitration is usually less costly and quicker than traditional litigation. But the party with less power in the negotiation should be mindful of the limitations of arbitration. Limited discovery may make it harder to prove a breach and there is no right to a jury in arbitration.
4. Choice of law — Parties to a contract can designate in what state any contract dispute must be brought and which state’s law will apply to the dispute, including whether the court should consider the forum state’s choice of law provisions. If you are located in New York but the other party to the contract is located in California, to avoid needing to travel to California to resolve any dispute related to the contract, be sure to designate New York as the forum for any disputes. In addition, you should designate New York law as the law governing the agreement, without application of its choice of law analysis.
5. Merger and integration clause — This clause provides that the contract includes the entire agreement of the parties and no other terms, which may have been discussed or considered by the parties but which have not been included in the written document, are part of the agreement. The entire agreement of the parties are merged and integrated into the one, complete agreement. If the other party has made a representation to you about the goods you are buying or the service that they are agreeing to perform, be sure this representation is written into the agreement that you enter if there is a merger clause. If the representation is not in the agreement, you may not be able to hold the other party liable if the good or performance does not equal the representation.
For assistance with contracts or contract disputes, please contact Felicello Law, P.C.