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THE USUAL SUSPECTS
IN C0NTRACTUAL DISPUTES
Introduction:
Whenever someone
asks me if they can personally draft what they invariably term, “a
simple, short contract” that will avoid the cost and time of formal
drafting by attorneys, I always ask them the same question. I ask them
if they have even been engaged in either
litigation or
arbitration concerning a contract.
If they proudly
answer, “no,” I tell them that they should not attempt to draft their
own.
They are usually
surprised, thinking that their success in avoiding disputes in the past
indicates skill on their part and demonstrates that they should be able
to write up their own contracts.
The opposite is the
case, of course. Until one’s drafting is tested by aggressive and
skilled adversaries, one can not know what really matters, what terms
are vital and how one’s own skills have avoided typical problems.
It is akin to a
sailor who has always used the wrong knot to tie his boat to the dock
feeling confident that he knows how to tie knots, forgetting that
without a storm, he can not know if the knot really works.
Or, as one client
put it after we finished a truly harrowing arbitration in which a
contract was attacked in every conceivable way, and survived, “The
contract is our suit of armor, isn’t it? Each word counts.”
Only if they have
been tested can you know if your terms are the right ones and if you
have anticipated the problems that can arise.
And form books,
often written by unschooled beginners at the trade, and never adjusted
to the precise problems confronting a particular transaction, are
actually often harmful. See our story,
Form Contracts
Never Go to Trial.
Anyone who has been
in this business long enough knows that certain themes keep recurring in
contractual disputes. If one is tempted to write one’s own contract, it
is important to recognize the typical “suspects” that seem to cause the
most disputes when tested. This article shall outline those the writer
has encountered most often. The reader should first read our article
Binding Contracts and
Legal Actions Predicated on Breach of Contract before
proceeding further.
The Fundamental Things
Apply As Time Goes By…
-
The Parties:
One
would think that this most basic issue…who is bound by the
contract…would be a no brainer. It is not. First, you have the issue
of corporations, partnerships, LLCs and other entities being often
involved, often without assets in them to assure payment (thus
requiring a guaranty) and confusion often as to what entity is doing
precisely what. Many contractual parties are not even sure as to
whether their entity or they, themselves, are the parties bound,
often signing for a corporation without using the correct
terminology so mistakenly signing for themselves, personally.
At times two
parties will execute an agreement and not realize that a third or
even forth party should be required to sign on to make the agreement
work. (It does little good to sign for delivery of a product from
abroad if the party abroad has not executed the agreement the
distributor has put before you.) And successor liability is equally
vital. Remember that the contract often ends if the party executing
it ceases to exist…unless you have put in clauses indicating who
remains bound even if the corporation or LLC ceases to be in
business.
-
Unforeseen
Duties and Problems:
The old axiom,
“No battle plan survives contact with the enemy” can be equated with
the business maxim “Nothing ever goes precisely according to plan.”
Delay in delivery, alteration in production or material cost,
failure of third parties to perform, unavailability of parts or
products, strikes, natural disasters, etc. all can alter the facts
of the contract, some being serious enough to make the contract
impossible or impractical to perform. What happens? Who assumes the
risk? Sadly, amateur contracts quite often ignore these issues.
-
Timing Issues:
Most
amateurs know that a time for performance should be put in any
contract but few realize that the clause must also indicate the
significance of failure to meet that time table. Is a delay of a day
enough to end the contract? An hour? Is it a breach of the contract
or does the contract simply end? The term “time is of the essence”
is a useful phrase to utilize if that is the case, but it is far
better by far to provide in detail what happens if X occurs late and
to define precisely what “late” means.
-
Changes In the
Contract:
This issue is a variation of number 2 above but involves the
question as to how the contract is changed. Any formal contract will
require an executed change and that is a very good idea. The
alternative is a long and expensive dispute as to who said what
when. Further, a good contract will have terms as to what happens to
prior understandings of the parties as to the subject matter. One
client found to his shock that his contractual partner considered
the contract they were acting under an amendment to a year old
agreement rather than a new agreement which superseded it.
-
Law That
Applies:
Nowadays, most
contracts involve entities scattered about the world, often
involving use of the internet and transport across other
jurisdictions. Each country and many states have very different laws
and often parties find to their shock that the law of the other
party not only does not support their understanding of duties, but
may actually prohibit duties undertaken. Federal law including but
not limited to that involving hazardous waste can impose conditions
on the contract that one or both parties do not even realize. The
law of the locale and the choice of which locale’s law is important.
And if one does not know what law applies, one cannot perform the
task of confirming that the contract does not have duties and
conditions imposed by the relevant government.
-
Enforcement
Provisions:
If it costs you a hundred thousand dollars to win thirty thousand
dollars, how can you ever realistically consider your contract,
however written, binding? The practical need to have affordable and
fair enforcement provisions is as vital as any other aspect of the
contract, but few amateurs put in the
arbitration
clauses that can save half the cost of the fight or provide for the
prevailing party receiving reasonable attorney fees from the losing
party which is both a great equalizer in the battle and can make the
wronged party whole regardless of cost.
-
Right to
Terminate:
Life of Contract: When does the contract end? What ends it?
What happens to unfinished duties if it ends? Can either party end
the contract? Due to breach? At will? Is it a contract that
automatically renews? When and why? And beware those contracts that
indicate they are three year contracts that either party can
terminate upon thirty days notice. They are thus thirty day
contracts and the three years wording means…nothing.
-
Waiver: How to
Do It?
One can lose a
right if one acts in a certain way or does not take certain
proactive steps. A good contract will indicate what constitutes
binding waiver.
-
Competition.
Can
the Parties engage in their own activities even if their own
activities may injure the other? Such as competing against each
other even during the contract? If you say no, does that violate
anti trust laws? If you say yes, are you not helping your competitor
by providing them with critical information? Related to this are the
concepts of confidential information, trade secrets, and allowed
disclosure of information. In a world in which intellectual property
is becoming an increasingly vital aspect of all business, these
clauses are becoming increasingly complex and important.
-
Confidentiality.
What aspects of
the agreement are confidential, if any? Pricing? Parties? Shared
plans? What happens if a party violates it?
-
Ownership of
Results.
In any agreement
involving creation of intellectual property of any kind…including
copyright, patent, or trade secrets such as methods, customer lists,
etc., who owns what? For how long? A restricted license back to the
other party? For what consideration?
-
Authority.
Who
is authorized to make changes or approve performance? Who is to
inspect the results and is there a time limit on the report back?
What is waived if the time limit is not adhered to?
-
Complaint
Procedure.
If a party
objects to performance, how is that to be communicated and what are
the time limits for cure before legal action can be taken? Is there
a right to replace nonconforming goods? What criteria and inspection
of the replacement goods is allowed?
-
Warranties. Warranties
as to quality of product and services probably constitutes the
single most litigated area of contract performance…and is subject to
strict state and federal law as to the limitations that can be
imposed. To limit a warranty requires specific wording which must be
incorporated.
-
Contradictory
Documents.
Especially in a
prolonged transaction there is a tendency either via emails,
letters, purchase orders or invoices to have one party incorporate
terms and conditions or requirements that are not in the underlying
documents. A strict hierarchy of which documents control and what
rights there are to alter them with contradictory confirming
documents must be created.
The above list is
merely introductory and represents those areas we see as sources for
disputes most often. Any good attorney could list an additional twenty
areas in which the contract drafting must be carefully honed.
But the lesson
should be clear. Even a “simple contract” is rife with dangerous areas
that must be considered before one signs on the dotted line.
Conclusion:
An elderly attorney
had a comment he would always make when a client indicated he wished to
save money by doing his own contract. “Go ahead. In the long run, it
will make me far more money. Pay me now or pay me a lot more in court…”
Of course many
people and businesses go for decades without having problems with their
own contracts or with form created books of contracts. However, in a
world becoming increasingly international and multi jurisdictional, and
in which parties long trusted may suddenly have new owners or be in dire
economic condition, it makes good sense to carefully consider if one has
the expertise to gain maximum protection from the draft one is creating. |
