| In Part I of this article, we covered common | | | | contract before the end of the term? Fourth, can |
| mistakes that businesses make and how to avoid | | | | either party terminate the contract early for |
| them. In this part of the article, we cover some | | | | convenience, instead of for cause? Finally, what |
| additional mistakes, and some additional steps that | | | | rights and duties continue to exist following |
| can be taken. | | | | termination? Contracts are often drafted so that |
| Mistake Number 6: Ignoring Key Contractual | | | | certain provisions (such as, for example, |
| Provisions | | | | confidentiality obligations) continue to apply long |
| Many businesses, particularly small businesses | | | | after the contract has terminated. Again, such |
| hungry for new opportunities, simply sign | | | | provisions may well be reasonable for particular |
| whatever contractual terms are put in front of | | | | transactions. However, it is important to consider |
| them by the other party. In general, this is a | | | | those issues at the outset and to understand the |
| mistake, because the terms are almost always | | | | risks being assumed before the contract is signed. |
| worded to favor the party presenting them. | | | | Dispute Resolution Provisions. Many contracts |
| Further, businesses often do not understand | | | | contain dispute resolution provisions. For example |
| some of the key terms that may have particular | | | | they may contain a forum selection clause, which |
| significant effects on their potential liabilities. Some | | | | requires any claims or disputes to be brought only |
| of these key terms include the following. | | | | in the courts of a certain state, or perhaps even |
| Warranties. In Part I of this article, we discussed | | | | a certain county. In most instances, these |
| how sales talk can create unintended express | | | | provisions will be enforced. Contracts may also |
| warranties, and how that potential issue can be | | | | contain provisions requiring binding arbitration of |
| avoided. We also discussed how, if not disclaimed, | | | | any disputes. Arbitration clauses require that |
| the law creates implied warranties. This discussion | | | | disputes be resolved outside of the court system |
| is not about those circumstances, but is about | | | | by an arbitrator or panel of arbitrators. Arbitrators |
| written warranties contained in the contract. | | | | are usually lawyers or retired judges. There are |
| Many business people simply ignore the warranty | | | | pros and cons to arbitration that are beyond the |
| language. Obviously, whether a party is a buyer or | | | | scope of this article. The important thing to know |
| a seller will affect their view of whether it is | | | | is that, particularly in commercial contracts, |
| advantageous for a warranty to provide broad or | | | | arbitration provisions are almost always enforced. |
| narrow protection. In any event, a party | | | | Accordingly, whether your company should agree |
| considering signing a contract should carefully | | | | to arbitration is something that should be |
| review these key warranty provisions: (a) what is | | | | considered at the outset. However, in my |
| covered and not covered; (b) the length of the | | | | experience, parties often overlook dispute |
| warranty; and (c) the remedies that are provided. | | | | resolution provisions in their contractual review. |
| Regarding the remedies provided, the Uniform | | | | Mistake No. 7: Assuming it's Non-Negotiable |
| Commercial Code generally permits parties to limit | | | | Many businesses, and particularly small businesses, |
| the available remedies. Accordingly, sellers will | | | | assume that the other side's form is |
| often limit the remedy for a breaching warranty | | | | non-negotiable when it is presented to them. My |
| to repair or replacement of the goods in question. | | | | experience is that is generally not true. The key |
| This may well be reasonable, but it depends on | | | | point is getting to a decisionmaker with the |
| the circumstances. The important point is to | | | | authority to agree to reasonable changes to the |
| evaluate these issues from the perspective of | | | | contractual terms. |
| your side's interests in entering the contract. | | | | Occasionally, a business will encounter another |
| Indemnity Provisions. Indemnity provisions are | | | | party that absolutely refuses to discuss |
| often misunderstood. In a general sense, an | | | | contractual changes. At that point, the value of |
| indemnity provision is a promise by one party to | | | | the potential business should be carefully weighed |
| "hold harmless" the other party in the event a | | | | against the contractual obligations that will be |
| third party asserts a claim against the party | | | | assumed. This can only be done through a careful |
| indemnified. Typically, the "hold harmless" obligation | | | | review and analysis of the contract. |
| includes two parts: First, an obligation to provide | | | | One option that is always on the table is walking |
| or pay for a defense of any lawsuit or legal | | | | away from the potential transaction. You may |
| proceedings, and, second, an obligation to pay any | | | | wish to consider what it would be like doing |
| settlement for judgment. Indemnities are often | | | | business with another company that is not even |
| very broadly worded in form contracts. As such, | | | | willing to discuss contractual terms. In this regard, |
| a business on the receiving end of a request to | | | | I offer the words of a very experienced mentor |
| provide an indemnity should be very careful. | | | | of mine when I was a younger lawyer: "Some of |
| Some of the key issues in reviewing an indemnity | | | | the best deals are those that were never made." |
| are as follows. First, consider the breadth of the | | | | Mistake No. 8: Using Internet Forms |
| indemnity. Does the indemnity, for example, | | | | In this day and age, the Internet affects |
| include claims that are based on the indemnified | | | | everything we do. There are forms available on |
| party's negligence or fault? Many indemnities | | | | the Internet for free or services that provide |
| include such claims, although some states limit the | | | | supposedly "professionally drafted" forms for |
| enforceability of such provisions. If enforceable, | | | | various business and legal needs. If you are |
| these types of indemnities can obviously have | | | | considering the use of such forms, I would ask |
| substantial consequences for the party providing | | | | you to review and remember the prime directive |
| the indemnity. Second, is there any dollar limitation | | | | (see Part I, Mistake No. 1). Saving a little money |
| on the indemnity obligation? The potential harm | | | | now by using an Internet form instead of seeking |
| associated with an indemnity can sometimes be | | | | professional advice and counsel may seem like a |
| limited by restricting the indemnity obligation to no | | | | good idea. However, if you do not really |
| more than a fixed amount. | | | | understand the form and you are not able to |
| Third, and most importantly, is the indemnity | | | | interact with a lawyer concerning what the |
| obligation covered by your liability insurance? Any | | | | document means and your business's particular |
| party that is asked to provide an indemnity in a | | | | needs and circumstances, I strongly doubt the |
| contract should provide a copy of the indemnity | | | | result is going to be very satisfactory. |
| language to their insurance broker for review. The | | | | One truth in the law is that "one size does not fit |
| broker can usually provide advice on whether | | | | all." Documents need to be tailored and crafted to |
| your liability insurance will come in and pay for the | | | | the particular client and to the client's particular |
| defense and other obligations in the event of an | | | | circumstances. Small businesses can find |
| indemnity claim, subject, of course, to policy limits | | | | competent legal counsel who can serve their |
| and other policy terms and conditions. | | | | needs for a reasonable price, and that money is |
| Limitations of Liability. Many contracts contain | | | | usually well spent. Someone recently remarked to |
| provisions limiting one party's liability to the other. | | | | me, "What is the value of the lawsuit avoided?" I |
| For example, a contract may limit a party's total | | | | think that pretty much sums up why |
| liability to the sales price of the contract or the | | | | "do-it-yourself' is probably not a good idea |
| amount of fees received under the contract. In | | | | regarding legal issues. |
| many instances, these limitations are enforceable. | | | | Mistake No. 9: Letting Your Employees Vary Your |
| It is also common for contracts to exclude | | | | Terms and Conditions |
| various types of damages. For example, incidental | | | | If you have worked with an attorney and have |
| and consequential damages are often excluded. | | | | developed a set of terms and conditions of sale, |
| Although a discussion of what constitutes | | | | there may well be a time when a customer will |
| incidental and consequential damages could fill at | | | | ask for changes. As you can tell from the |
| least several chapters of a legal treatise, the | | | | discussion above, I certainly think you should be |
| most common example of consequential damages | | | | willing to discuss reasonable changes with the |
| is probably lost profits. | | | | other party. However, it is not a good idea to |
| Many businesses will insist on excluding | | | | allow your employees (particularly sales people) to |
| consequential damages. Such limitations are | | | | vary terms and conditions at a whim or any time |
| common in many types of contracts, such as for | | | | a customer requests a change. |
| the sale of production or manufacturing | | | | For example, consider the issue of a forum |
| equipment. The reason is simple: All equipment, no | | | | selection clause, a topic that was discussed earlier. |
| matter how well made, can break or malfunction. | | | | If your company is a small business doing |
| If the equipment is production equipment, the | | | | business in Georgia, it may have a strong interest |
| customer's business may be shut down for hours | | | | in making sure that any disputes are resolved in |
| or even days. If the equipment supplier is faced | | | | Georgia so that it does not have to bear the |
| with the prospect of having to pay for the | | | | potential expense and difficulty in litigating out of |
| customer's lost profits, it in effect becomes an | | | | state. If a customer from the West Coast |
| insurer, and not an equipment seller. Sellers | | | | requests that the forum selection clause be |
| undertaking such an obligation might be driven out | | | | changed to mandate the courts of say, Montana |
| of business by a single claim. As a result, these | | | | or Oregon, that would prove to be highly |
| types of exclusions are quite common, and are | | | | detrimental in the event of a dispute. |
| typically enforceable. Parties should carefully | | | | The point is that any changes should be carefully |
| consider whether such limitations and exclusions | | | | considered in light of the needs and circumstances |
| are appropriate for their circumstances. | | | | of your business and the legitimate requests and |
| Termination Provisions. At the time parties enter | | | | interests of the other party. Sometimes, changes |
| into a new business agreement, they are often | | | | will be acceptable. However, allowing employees to |
| positively giddy about the prospects of their | | | | disregard terms established in consultation with |
| future success. As the new venture is being | | | | your counsel any time they see fit effectively |
| toasted with champagne and praised, no one | | | | undermines your company's efforts to manage |
| expects that anything will go wrong. | | | | legal risks. |
| Unfortunately, over 25 years of litigation | | | | So there you have it. In Parts I and II of this |
| experience have taught me that things | | | | article we have discussed nine common mistakes |
| sometimes do go wrong. Therefore, it becomes | | | | that businesses (particularly small and medium |
| important to consider termination provisions at | | | | sized businesses) often make. We have also |
| the outset. | | | | discussed ways in which those mistakes can be |
| Parties should consider the following issues. First, | | | | avoided. Of course, this article is purely for |
| how long does the contract last? A long term | | | | information, and is no substitute for discussing |
| may involve greater risk. Second, what right does | | | | these or other issues with your own lawyer. |
| your business have to terminate the contract for | | | | Please note that this discussion is based on |
| the other party's non-performance before the | | | | general principles of Georgia law, and that you |
| end of the ordinary term? Third, under what | | | | should always discuss legal issues with an attorney |
| circumstances can the other party terminate the | | | | licensed in your jurisdiction. |