All too often when entering into important contracts, small business owners fail to fully grasp or understand the ramifications of certain contractual provisions, which should be included within an agreement or which can later turn into bigger issues or unexpected surprises for the parties. Unfortunately, these owners find out about such issues the hard way, after the contract is signed and a liability or claim has already occurred. Below is a list of some common contractual provisions to be aware of and to look out for prior to signing any long term or material commercial contract:
- Indemnification – If a contract requires you to indemnify someone, this essentially means that you agree to fully compensate them from damages incurred generally from your actions or a third-party claim. Often indemnification provisions within a commercial contract are overly broad and not directly related to claims and/or damages that the other party could reasonably sustain due to your actions. Any indemnification provision should be reviewed carefully to ensure that it is not overly broad, is closely tied to the obligations under the contract and does not include coverage for improper performance and/or actions of the other party.
- Automatic Renewals – It is important to know the length of your obligation to the other party. Frequently contracts will include automatic term renewal provisions that do not require the parties to take any additional action to continue the contract. You should know for certain the end date of the contract to prevent a situation where you are at the mercy of the other party agreeing to terminate the agreement in order to cease the business relationship.
- Remedies – Any contract should include terms that state what happens in the event the other party fails to fulfill its end of the bargain. At a minimum, the contract should include assurances that if the other party fails to meet its obligations, you have the ability to terminate the contract. You do not want to be potentially bound to the contract terms when the other party is not performing its duties. Further, you should consider including other remedy items such as accrual of interest, collection of attorneys’ fees and court costs, as these items typically are not available to you unless specifically provided for within the contract. Further, if monetary damages will not fully rectify a breach, you should consider whether it would be prudent to require the other party to take an action or cease to take an action as a full remedy, and if this is the case, specific performance language should be included within the contract as a remedy.
- Performance Standards – Often contracts lack details regarding the parties’ obligations under the terms of the transaction. If items such as timing, quality and quantity are important, they should be included within the contract itself. Regularly contracts fail to fully encompass important terms of the parties’ obligations, leaving the parties unable to hold the other party to expected standards of the transaction.
- Warranties and Representations – If you are making any kind of warranty or representation within a contract, you should be sure that it is accurate. To the extent that a warranty or representation is inaccurate, it is important to revise it, omit it or otherwise incorporate a schedule of exceptions to the warranty to prevent a breach of the contract. Further, if certain premises are important to the terms of the deal, you should ensure the other party provides specific warranties or representations regarding such items.
The above are merely a few of the many items that should be carefully reviewed and considered when entering into a contract and is meant to be a broad overview of basic contractual considerations. It is important to review these and several items when entering into a contract to ensure that you do not get tripped up on these issues or involved in time consuming and expensive litigation, which could have been easily prevented with proper up front written documentation. You should seek the advice of competent and qualified counsel to review your specific situation regarding your matter.
Please contact Brodie Miller at Rinke Noonan at (320) 251-6700 if you have any further questions or concerns regarding contract review or your specific situation.
©2017 Rinke Noonan