I have a confession to make: I’m a bit of a geek (or maybe a nerd; I never could figure out what the difference is). I say that because I enjoy drafting contracts. One of the reasons I like to engage in such geekdom is that (1) drafting a contract for a client forces me to understand my client’s business better; and (2) I feel like I’m truly using my skills to protect my client’s interests. That’s why I wrote here that using online documents for your business is a very, very bad idea.
Please, please, please don’t use online resources for your legal documents. . . . Online documents are barely sufficient at best, and almost always inadequate in any meaningful way. Legal documents are not “one size fits all,” and so many of the legal tasks and processes that look simple are actually quite complicated under the surface.
I believe that business contracts should be like snowflakes: no two should be alike. Each contract should be tailored to the parties, the industry, and the particular transaction giving rise to the contract. That’s why cutting and pasting from contracts you find from a Google search on the web is such a bad idea. Those contracts were drafted for a particular transaction which probably does not correspond exactly to your proposed transaction.
Having said that, there are some provisions that almost every business contract should contain. You may have heard these provisions collectively referred to as “boilerplate.” The following is a list of 11 boilerplate provisions, and why they are important:
- Merger/Integration. This provision cements the terms of the transaction in the contract, and only in the contract. Basically, it states that no previous agreements, whether oral or written, count — only what’s written in the contract. Nobody can say “I know it’s not in the contract, but (s)he told me . . . .” If it’s not in the agreement, it’s irrelevant. That’s why it’s important to make sure your contract incorporates everything about the transaction.
- Amendment. Similar to the above, this provision makes sure that the only way to alter the contract after the fact is in writing, signed by the parties. No oral agreements after the fact count; they have to be written down and signed.
- Third Party Beneficiaries. This one is a bit technical, but basically it makes sure that no third party can make a claim under the contract. So, for example, if you have a contractual agreement with your supplier, and I’m the trucking company for your supplier, I can’t make a claim against you for your breach of the agreement, even if your breach affects my business. Only your supplier has a claim against you.
- Venue. This one is pretty important. It identifies the jurisdiction where any lawsuits must be brought — at least the state, and sometimes even the county. Since most (but not all) of my clients are here in Alabama, I fight pretty hard to ensure that any potential lawsuits against them are brought in each client’s home county here in Alabama. I don’t want them to be hauled into court in, say, Cook County, Illinois, and have to engage counsel and defend a lawsuit there. That would increase the hassle and expense exponentially.
- Choice of Law. Sometimes called “Governing Law,” this provision chooses what state’s (and sometimes nation’s) law will be used to interpret the contract. Different states treat contracts, and individual contractual provisions, differently. Since I’m drafting the contract (usually) according to my understanding of Alabama law, I want Alabama law to be used to interpret it if we have to fight about it in court. Interestingly (at least I think it’s interesting), you can have venue in, say, Massachusetts, but choose Alabama as the governing law, which would force the Massachusetts courts to interpret the contract the way an Alabama court would.
- Severability. In keeping with our meme of courts interpreting our contract, what happens if a court finds a particular term or terms of your contract unenforceable? The severability provision says that if any part of your contract isn’t enforceable, the rest is still enforceable (instead of voiding the entire contract completely). Sometimes it even provides that the non-enforceable provision can be enforced to the limit of its legality. So, for example, if you had an employee sign an employment agreement containing a non-compete provision that is effective for 10 years, and a court found that to be too long a time frame (and in Alabama it will!), the rest of the employment agreement can still be enforced, and the non-compete provision might still be enforced for, say, a year or two.
- Notice. This provision simply spells out how the parties are to inform each other of certain developments. For instance, if one party wants to cancel the contract, how does that party let the other party know of the cancellation? Many contracts contain a provision giving the parties an opportunity to remedy any breach of the agreement, after receiving notice of the breach. How is that notice delivered? Is an e-mail sufficient? A phone call? Certified mail? This is pretty important, because if you don’t give notice properly, you may be waiving some of your rights. Therefore, the procedure for giving notice should be spelled out and adhered to.
- Waiver. This simply says that if you choose to overlook some actions that the other party takes that would technically be a breach of the contract, that doesn’t mean that you are going to allow them to do it again, or waive your rights against them for future breaches. You can choose not to enforce your rights in some circumstances, and not give up your ability to enforce those same rights later.
- Effective Date/Execution Date. The effective date and the execution date are technically two different things, and both should be spelled out. You can execute a contract on February 3rd, but agree that the contract won’t be effective until March 1st. But you need both dates in the contract, so that there is no question as to timing, and when rights and responsibilities kick in. Also, the execution date can make a difference if you are trying to determine which of several related contracts is enforceable, because in the case of a conflict between two or more agreements, the agreement that was executed last is usually going to take precedence over the earlier contract(s).
- Assignment. The assignment clause simply states that the parties can’t pawn their responsibilities off on someone else. This may be a blanket prohibition of assignments, or there may be carve-outs for particular foreseeable events, such assignment to related or surviving companies in circumstances such as mergers, acquisitions, etc.
- Attorney Fees. This, in my opinion, is the most important. The attorney fees provision basically states that if the parties to the contract have to go to court against each other over the contract, the loser pays the winner’s attorney fees. (The legal default position, known as the “American Rule,” is that each party pays their own attorney fees, regardless of who wins and who loses.) This can be a huge factor in litigation, and particularly in negotiations to avoid litigation. If I owe you $1,000, you can sue me for that amount of money. But if you have to pay your attorney $3,000 to recover $1,000 from me, you go from being out $1,000 to being out $2,000. You may win in court, but that’s a monetary loss any way you look at it. With an attorney fees provision, if you sue me for the $1,000 and win, I have to pay you the $1,000, plus I have to pay your attorney his or her $3,000. That’s a powerful incentive for me to pay up before we get the lawyers involved!
So there you have it: the 11 provisions almost every business contract should contain. Keep in mind, though, that this list isn’t exhaustive. There are lots of other boilerplate provisions that may need to be included in your particular contracts, not to mention the non-boilerplate terms and provisions that will reflect your particular business deal. Also, although I told you what these common provisions do, they still take very careful drafting in order for them to be effective and provide you with the maximum protection available. Which brings us full circle back to my statement that simply finding samples of these provisions on the web and pasting them into your business contracts is a very bad idea. Believe me when I tell you that it is much less expensive to pay a business attorney to draft your contracts correctly, than to litigate a poorly drafted contract.