Can your business contract stand up in court?

Ambiguities, conflicting provisions and poorly phrased terms can limit or even extinguish valuable business rights


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The businessman quietly thanked his lawyer on the courthouse steps dismayed at the outcome of the four-day trial. The company had counted on a key contract being upheld, and recouping its lost revenue from a broken contract. Instead, the trial judge dismissed the company’s case. Truthfully, the trial lawyer had done all she could – even the best trial lawyer cannot help a company uphold a poorly drafted business contract.

The acid test of the enforceability of a business contract comes when the terms and provisions of the agreement are subjected to rulings in a lawsuit and trial. In that forum, ambiguities, conflicting provisions and poorly phrased terms combine to limit or even extinguish valuable business rights - usually at a time when nothing can be done to correct the problem.

Worse, the lack of enforcement of some contracts (employment contracts, franchise agreements, sales invoice forms) may spill over into transactions with other customers or parties. Knowing what common pitfalls result in judges or juries striking down or limiting contract provisions is not only the province of lawyers. Business owners and company managers can better seek and employ legal advice when they understand where the risks commonly lay when contracts fail in court.

 

Inconsistent terms

 

Transactions involving millions of dollars are often documented between two parties using their respective “standard terms and conditions.” However, the terms reflected in the invoice, acknowledgment, confirmation or other standard forms often do not mesh or are in conflict, so the contract’s enforceability is in jeopardy right off the bat.

Common inconsistent terms in sales transactions include the right and time to terminate, notice of breach, rights and time to cure deficient performance, limitations on warranties, damages, or disclaimers of certain liabilities.

Unless you are comfortable with the possibility of not getting paid, take the time at the beginning to make sure your terms throughout your legal documents are all consistent. Do not wait to “work it out later.”

Likewise, business entities often have multiple ongoing deals with business partners or contacts, sometimes with very different business issues or terms.

Lenders, suppliers and owners work together time and time again. Yet one set of terms rarely fits all. Separate transactions deserve separate agreements that clearly define its scope, breadth and duration, so that an alleged breach cannot adversely affect other ongoing deals between the parties.

 

Resolving disputes

 

Do not simply rely on the “boilerplate” regarding how a dispute will be handled should the agreement be breached, without making sure that it applies to your particular transaction at hand.

These are the procedural, technical and administrative terms that often critically define your rights under the contract. If problems develop, will you need to get judicial relief quickly for an attachment of the breaching parties’ assets, or to obtain injunctive relief? Have you agreed to mediation before any lawsuit can be filed, likely creating a significant delay, or perhaps even binding arbitration before some trade organization or group? Have you agreed to litigate disputes over your New Hampshire deal only in the state or federal courts of California? Have you agreed to choose by contract to apply the legal rules of principles of another state -- or country?

Provisions on where, when, and how a dispute will be resolved are not random, they often favor one party or another based on their relative needs or vulnerabilities. They should always be well understood and often need to be negotiated. Do not ignore the “fine print.”

Limits and limitations

Parties to a contract can agree in most cases to change by their agreement legal rights, limit amounts of compensatory awards, change time periods to make claims and alter a wide range of remedies or consequences of breach of the agreement.

Always understand the terms fully. If the terms do not adequately protect your needs, do not agree to them.

Do the terms limit certain types of damages for breach – (“lost profits, consequential damages”) or limit the amount of damages to a fixed ceiling (“notwithstanding any other provision of this agreement, liability for building collapse shall not exceed $50,000”)? Does the agreement require notice of claims within 30 days and lawsuits be brought within six months, rather than the usual several-year legal statute of limitations? Does each side pay their own attorney’s fees (the “usual” legal rule) or does the winner of the dispute also get an award of reasonable attorney’s fees? Have you agreed to indemnify the other party for potentially large damages resulting from losses, even catastrophes? Understand how damages will be assessed in the event of a breach, so that you are not blindsided.

Business disputes, of course, involve contingencies, unforeseen events, and personal disagreements that extend well beyond contract language issues. You cannot plan around or avoid all of them. But knowing your contract terms and crafting them to reduce risk, protect your interests, and draft them to fairly and effectively adjudicate the dispute is entirely within your, and your legal advisers’ control. It is simply not enough to shake hands on a deal and “have the lawyers write something up.”

Bruce Felmly, co-chair of the Litigation Department of the McLane Law Firm, can be reached at bruce.felmly@mclane.com or 603-628-1448.

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