Contracting is one of those necessary albeit rather pesky aspects of running a business. The contracting process can be a seemingly never-ending cycle of negotiating, drafting, and re-negotiating, and the ongoing management of a company’s contract portfolio requires constant oversight. Granted, there are some one time contracts that are quickly executed and perfectly performed, but those are likely the exception rather than the rule. One of the reasons that contracts even exist is to help ensure that parties perform as stipulated and to provide for recourse in the all too likely event that something does go wrong. Although there is a growing movement to rely on outcome-oriented contracts, the primary focus during negotiations and drafting continues to be risk mitigation and allocation. For this reason, here are five contract terms business leaders must know:
By entering into a contract, the parties to the agreement are subjecting themselves to the terms and conditions of the legally binding and enforceable document. Essentially, the parties are declaring their intention to perform in a certain manner, and they will be held responsible and accountable for performing as agreed upon, or for failing to do so. During the contract negotiations, one or both parties will often seek to limit their liability in the event that certain things occur. For example, parties may try to include certain circumstances under which they will not be held liable for delayed or incomplete performance. It is generally acceptable for a party to avoid liability if something bad happens that was beyond the party’s control, such as the occurrence of a natural disaster, a change to a law, or some other “act of God.” In most other cases, however, if a party does not perform as contractually agreed upon, the responsible party will be liable for the consequences.
Another contract term that is related to the concept of liability is disclaimer. People generally think of disclaimers as being the small, fine print at the bottom of a document that no one bothers to read. However, parties to a contract often seek to include disclaimers to avoid responsibility for something. This is obviously very similar to the idea of limiting liability, but it may be inserted elsewhere as an additional attempt to evade potential consequences. Of course, there are circumstances under which a disclaimer may be appropriate. For example, a contract between a firm and an individual for professional services during a specified timeframe may include a disclaimer that the document as written does not constitute a contract for employment.
Both disclaimers and liability really come into play if there is a breach to the contract. Although a breach of contract is generally understood as one party’s failure to perform as required by the contract, various actions may occur during the life of the contract that could also be construed as a breach. This is because parties to a contract often define a breach and/or reference what would constitute a breach in various clauses throughout the entire contract. It is of the utmost importance that all parties to an agreement carefully read every word of a contract and consider each clause individually and as a whole to ensure that they understand the actions or inactions that would trigger a breach.
In addition to understanding how a breach may occur, it is important to know how the breach would be handled. The way in which a dispute is handled depends on the state or country that has jurisdiction, and this is usually specified in the contract itself. Given that the parties to many contracts reside in different states and sometimes even different countries, it is imperative for the parties to decide which state or country’s laws would govern. It is very common for commercial contracts to use New York as the governing state, although there may be other jurisdictions with laws that are more favorable depending on the nature of the contract.
Contract breaches can have a very negative impact on one or both sides to a contract, so there must be a remedy or remedies available to the parties. These remedies generally include some form of damages, which is financial compensation for the inconvenience and/or losses incurred. However, other remedies may be available as well, such as an injunction again further injurious action, a demand for specific performance, or rescission of the contract altogether.