Business Contracts: I Read the Fine Print... So Should You

Originally published in October 2016

Copyright © 2016 Knox McLaughlin Gornall & Sennett, P.C.

This article has not been updated for current law since the date of its posting on the website. This article is not intended to provide any legal advice. Please seek advice of your professional council.

Any U.S. federal and state tax advice contained in this communication is not intended or written by the Knox Law Firm to be used, and cannot be used by you, for the purpose of: (i) avoiding penalties under the Internal Revenue Code that may be imposed upon you, or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

Introduction to Commercial Contracts

Acceptance of a Contract

Acceptance can be accomplished by either an agreement or an act. The document may or may not reflect additional terms which form a part of the agreement.

Prior and Subsequent Writings to a Contract

All documents/terms which were part of the contract negotiations need to be referenced or incorporated in the agreement itself. To the extent they are not, a party may not be bound to performance.

Subsequent writings, while evidence of intent, may not be legally enforceable without additional consideration. Parties also need to ensure that the modification or amendment language in the agreement is followed when changing or altering an agreement

The Substance of a Commercial Contract

Purchase

Parties need to identify what is being purchased, in sufficient detail so as to be enforceable. Is there any requirement regarding the quality of goods? Do all parts have to be new? The quantity of the item or service needs to be sufficiently identified. If there is a deadline for performance it must be sufficiently identified, and to the extent necessary, called out so the other party cannot claim ignorance. Care should be taken to identify, if needed, what remedies there are for failing to perform on a timely basis.

Prices

Questions to consider:

• Is the price firm, or is it an estimate?
• Do changes need prior approval?
• What is the means/manner of approval?
• Are there any “best price” provisions in the agreement?
• If the price is a quote, how long must the quote be honored?
• What are the payment terms? Is there any discount given for accelerated payment?
• If timely payment does not occur, is there a late payment fee or interest to be added?
• In the case of multiple agreements between the same parties, is there an ability to set off claims of one agreement against another? Is there an ability for a default of one agreement to constitute a default of another?

Taxes

In general, a party is obligated to pay the taxes assessed to them by law. Did the price in the quote/agreement include or exclude sales tax?

Dispute Resolution / Venue

Most agreements will specify a specific state law which applies to any dispute between the parties. Most agreements will specify a specific jurisdiction to resolve any dispute between the parties. Parties should be cognizant that choice of state law and jurisdictions for a dispute are enforceable to the extent these have a rational connection to the transaction (corporate headquarters, place of performance, etc.).

Mediation is a requirement which requires parties to submit to discussions, before going to litigation, in a hope to resolve the disagreement amicably.

Arbitration constitutes private court, which may or may not include the ability to appeal to an actual court.

Assignment / Changes in Ownership

Assignment governs the right to transfer the agreement in whole, or perhaps in part, to a third party. This can and many times does include delegation to subcontractors. If the agreement is silent, assignment can be made without any consent.

Agreements many times call for a specific protocol to be undertaken before consent to an assignment may be given. In the most extreme cases, rights of first refusal are included in assignment provisions.

Agreements can also restrict the ability of a company to change its ownership, or, alternatively, terminate an agreement if a change in ownership occurs with a party to an agreement.

Shipping Terms

Must identify who is paying for shipping costs, insurance and risk of loss in transit. Certain commercial shipping terms, or Incoterms, are included to govern risk of loss and payment for shipment. If there are any specific shipping requirements, they must be included.

Delays / Holds / Changes

Questions to consider:

• Is time of the essence? Should a grace period be included?
• Is there a force majeure provision in the agreement to govern acts of God? Does it only govern acts of God, or other items that are actually under the control of a party?
• Does a party have the ability to place a hold on performance, even after work has commenced? How long does this period last? Is there any financial consideration that must be given for the hold?
• Can changes to the work be made? At what time and place?
• Is the right to change unilateral or does a party have a right to refuse or increase the price?
• What is the method for confirming the change so that it becomes enforceable?

Intellectual Property

Questions to consider:

• Who owns the tools, equipment, materials, drawings, procedures, processes, know-how, etc.?
• What is the requirement to return these items? Is there a further limit of confidentiality to parties “in the know?”
• Is there a restriction to a party only serving one customer in a given industry?
• For certain custom work, who owns the work? Did a party perform this as a “work for hire” or did the recipient of the work only receive a license to utilize the goods?
• Is there a conflicting Non-Disclosure Agreement that was entered into prior to the agreement?

Warranties

Questions to consider:

• What has been warranted for the goods or services?
• Are the warranties of merchantability and fitness for a particular purpose applicable?
• How long does the warranty last?
• What is the remedy? Is it repair and replace?
• What are the requirements for a party to make a valid warranty claim? What is the time limit for reporting? Does a party have to take other measures, such as ability to inspect?

Indemnity and Insurance

Questions to consider:

• What does the indemnity cover?
• Is the indemnity solely for claims of third parties or as a proxy for any other breach of the agreement?
• Is there any trigger for the indemnity provisions to become applicable?
• What insurances are being required by the parties? What coverage amounts apply, and do the parties have them?
• Is there an additional insured, loss payee or other interest that must be granted to another party?
• Is there a waiver of subrogation for any long term arrangements?
• Is there a cap of liability for any indemnity claims, depending upon the nature of the indemnity?

Termination and Remedies

Questions to consider:

• Can a party terminate for any reason at any time? What are the damages?
• Is the agreement only limited to termination for default?
• Is there a requirement for an opportunity to cure?
• Is specific performance a requirement or able to be obtained based upon the nature of the agreement?
• Does the agreement contain a limit of liability?

Purchase Orders

Conflicting Terms

The exchanging of purchase orders, with conflicting terms, followed by performance, creates a legally binding agreement.

Even though the terms may conflict, if the parties performed as if there was an agreement, and even though a purchase order specifically provides it cannot be changed, such terms will be negated or changed.

No Signed Agreement

Even if an agreement is not signed, there still can be an agreement. The ultimate performance, or even commencing work, will create a legally binding agreement. The terms as exchanged between the parties will constitute the agreement.

Uniform Commercial Code (“UCC”) Direction

When comparing the two (2) agreements, to the extent there are topics addressed by one (1) document when the other is silent, those terms will stand. To the extent the terms of the two documents contain conflicting language, these terms will be cancelled, and the UCC will fill in the terms, which are generally more favorable to the buyer of the goods. Other terms are filled in with what would otherwise be deemed “commercially reasonable.”

Originally published in October 2016

Copyright © 2016 Knox McLaughlin Gornall & Sennett, P.C.