An Ounce of Contractual Provisions is Worth a Pound of Cure: A Desk Checklist for Important Contract Considerations
It is an unfortunate reality that retail and restaurant professionals are often too busy with the demands of their day-to-day responsibilities to read each word of every contract that comes across their desk, whether it may be a store lease, a vendor agreement, a contractor’s proposal, or otherwise. In the event that you find yourself in a pinch, below is a quick reference on some of the most important features to ensure you have in your contract and a reminder of which terms ideally should involve the advice of an attorney.
1. Payment Schedule
It is important to ensure that each party’s respective payment obligations are clearly established without ambiguity. In the event that partial payment is required prior to performance, the timing of the payment should be described in great detail to avoid confusing either your contractual counterparty or, in the worst case scenario, a judge or jury.
2. Material Breach
Material breach differs from a normal, everyday breach of contract in that it relieves the non-breaching party from its remaining contractual obligations. In other words, if your counterparty commits a material breach of your contract, you are not required to continue performing. Taking time on the front end during negotiations to identify significant risk factors as examples of conduct that would be considered a material breach of the agreement could provide leverage in the event that the performance of the agreement does not go according to plan. As an example, defining a material breach to include the failure to timely remit a partial deposit payment by a certain date as required under the terms of the contract could prove to be a powerful incentive to your counterparty to ensure that you are paid on time.
3. Interest on Overdue Balance
Include a specific provision that ensures that you are entitled to recover pre-judgment interest on any amounts owed under the contract. Courts will generally enforce such a provision when negotiated between sophisticated commercial entities provided that the interest rate is not usurious. Tying this interest obligation to the U.S. prime interest rate is an effective strategy for ensuring that the amount of interest eventually awarded will not only track inflation, but also would be considered reasonable by a court.
4. Indemnity
Indemnity is a critical component of contracts that contemplate manual labor or otherwise could give rise to significant liability. Various states take different approaches to contractual indemnity, so it is critical to ask your attorney to review and advise as to the sufficiency or potential exposure of the indemnity language in your contract. Generally speaking, parties with greater bargaining power force their vendors and other counterparties to accept onerous indemnity obligations, but they will sometimes accept counterproposals that strike a fair compromise.
For example, parties often agree that a “knock-for-knock” approach represents an acceptable middle ground. Under this style of an indemnity framework, each party agrees to defend, indemnify, and hold harmless the other for any potential liability that could arise out of injury to its own personnel or damage to its own property, regardless of fault. In other words, if Party A causes damage to Party B’s equipment, under a knock-for-knock scheme, Party B would bear the loss and would not be able to sue Party A for the equipment damage. Likewise, if Party B’s personnel were to sprain an ankle due to Party A’s failure to maintain a safe floor on which Party B was working, Party B would be obligated to indemnify Party A for any liability that could arise out of the sprained ankle, even though Party A is at fault. This approach gives the parties a greater chance of controlling their own destiny, as it generally rewards parties that take great care of their equipment and whose personnel exercise safe work practices.
Another key aspect to consider is whether the indemnity clause requires any party to indemnify another party for liability arising out of its own negligence. The law generally disfavors these clauses as a matter of public policy because, in theory, the safety net of another party’s indemnity obligation kicking in regardless of your own fault reduces your incentive to be careful. Some states will enforce these types of clauses, but only if they satisfy certain conditions and requirements (e.g., the express negligence rule in Texas). It is critical to always consult with your lawyer regarding contractual indemnity.
5. Blue Pencil
A “Blue Pencil” clause permits a court to “delete” any parts of your contract that would be unenforceable under the applicable law without voiding your entire contract. The law is constantly changing, and depending on the applicable state or federal law, certain provisions may be unenforceable. Consequently, some contractual obligations, although agreed to by the parties, can run afoul of public policy and subject your contract to judicial cancellation. Make sure that your contracts contain a “Blue Pencil” clause to avoid having your entire contract thrown out as a result of an ancillary, boilerplate clause that cannot be enforced under the relevant law.
6. Law and Jurisdiction
A law and jurisdiction clause specifies what state’s law applies to the terms of your contract. This is critical because the question of which state’s law governs often affects which contractual provisions may even be enforced, especially with respect to contractual indemnity. Contact your lawyer to ensure that you are selecting the state’s law that would be most favorable to the terms of your agreement and that the clause is carefully drafted to avoid the application of any conflicts of law principles that would result in the application of a different state’s law.
7. Forum Selection
Forum selection clauses allow the parties to choose the court or arbitrators to which or to whom any contractual disputes will be referred for adjudication. In other words, the parties agree to waive any challenges to the exercise of personal jurisdiction over them, and any lawsuit arising out of the contract must be filed in that court or submitted to those arbitrators. Consult with your lawyer regarding recent trends in jury/bench verdicts and arbitral awards to determine which forum may be most favorable to you in the event that you have to bring or defend against a lawsuit in that jurisdiction. Historically, arbitration has offered certain advantages over litigation, including the speed of resolution of the proceeding, which translated to lower total attorneys’ fees, but recently, arbitrators’ costs have increased significantly. Additionally, certain arbitration organizations offer dispute resolution timelines that are no faster than some courts.
Additionally, your lawyer should be able to draft a clause that selects your local federal district court as the appropriate forum in the event that federal subject matter jurisdiction may exist, but, if not, alternatively selects your preferred state court venue. Federal court often presents as a more favorable venue over state court due to the speed of the proceedings and the comparatively broad geographic location from which a jury would be selected.
8. Waiver of Consequential Damages
Consequential damages, such as delay damages and loss of profit, should be expressly waived in your contract. Ensure that your contract expressly waives any potential right to the recovery of these types of damages to protect yourself from a counterparty claiming that your allegedly substandard performance drove off their biggest customer, which could significantly increase your potential exposure.
9. Confidentiality
When dealing with sensitive information under embargo or otherwise requiring discretion, confidentiality should be explicitly agreed upon by the parties. Some jurisdictions may require additional consideration between the parties for a confidentiality provision to be enforceable, so run your confidentiality clause by your lawyer to make sure that it will pass muster under the governing law.
10. Authorized Representative
This provision is often overlooked because it seems so self-evident that the person signing the contract on behalf of the company with whom you are contracting would be imbued with the appropriate authority to do so, but it is critical to include. Occasionally, parties who have not taken the appropriate care to ensure that the terms are as favorable as they might have liked will try a “Hail Mary” by arguing that the person who signed the contract was not actually authorized to do so. Although these arguments are often viewed with great skepticism when raised by a sophisticated commercial entity, it is best practice to include a clause that explicitly acknowledges and disarms this possible argument.
11. Integration
An integration clause represents an acknowledgement by all parties that the terms contained in the signed contract supersede and displace any prior understanding or course of dealing between the parties. It explicitly integrates any previous oral or written agreements into the contract and causes the terms of this new document to replace the terms of any previous agreement. This clause is important to avoid any potential argument from your counterparty that they were under the impression that some previous contract’s terms could apply instead of the terms of your newly negotiated agreement.
12. Attorneys’ Fees and Costs for the Prevailing Party
Finally, attorneys’ fees are often the reason many parties prefer to avoid litigation altogether, even when they have done nothing wrong and their contractual counterparty is in breach. Include a provision in your contract that requires the “prevailing party” in any dispute arising out of the contract to indemnify the non-breaching party and hold them harmless for their attorneys’ fees. Ask your lawyer to define the term “prevailing party” as broadly as you would like—i.e., even if the lawsuit does not proceed all the way to trial, if any settlement is paid, the party receiving the settlement payment would be the “prevailing party” and thus could seek reimbursement of the fees and costs they incurred in connection with the lawsuit.
Disclaimer: This material is provided for informational purposes only. It is not intended to constitute legal advice, nor does it create a client-lawyer relationship between Galloway and any recipient. Recipients should consult with counsel before taking any action based on the information contained within this material. This material may be considered attorney advertising in some jurisdictions.
