Looking Beyond the Contract Price: Often Overlooked Contract Terms
Running a business take time. A lot of time. So very much time. Business owners serve in many different roles and provide many different functions for their businesses. Lawyer, however, is not one of them (unless you’re a lawyer, obviously). And so, when it comes to reviewing and negotiating a contract, time constraints and other considerations make it a tempting prospect to focus on the contract price and specific transaction terms, while avoiding the complex legalese of a contract as “standard” or otherwise not worth the time and effort at reviewing, negotiating and revising. But it is in these terms where the true measure of a contract is taken. The contract price and deal terms are the easy party, while the bulk of the risk in any given contract rests in the legalese. And so, the bulk of the time spent negotiating or drafting should focus on the legal terms rather than the business terms.
Here are some of the key terms to focus on:
Default. What constitutes a default in the contract? Obviously, if the contract is to develop software and no software is developed, that will be a default. But contracts typically define default in broader terms than simple failure to complete the bargained-for promise. Carefully review and consider the default language, how likely it may be that you could end up in default, and what the consequences would be for default by either party.
Termination. The ability of either party to terminate the deal is a key term. Are you able to terminate if the other party isn’t living up to the deal? Only “for cause”, or can you terminate upon certain amount of notice? How is “cause” defined?
Representations and Warranties. These are the factual statements and guaranties that one party makes to another to induce the deal. Each party must rely upon the representations and warranties of the other in determining whether to enter the transaction. For that reason, this is one of the sections of any contract in which the most liability will be found. If there is discrepancy or issue after the contract is formed, any failure to accurately represent facts and any breach of a warranty will potentially carry substantial liability. Do not rush through this section. Take time and make sure you agree with every word.
Limitation on Liability and Indemnification. These provisions determine how much liability a party might have in the event of a breach or other contract issue. Be careful the other party does not limit their own liability too much, and review the indemnification provision to make sure you’re not giving too broad a promise to pay their costs and expenses if issues arise.
To reiterate, don’t just focus on the contract price or other transaction terms. Carefully review these other provisions so that you can identify and mitigate your risks if you breach and can include the appropriate protections that you need if the other party breaches. Bear in mind that you may need to push back numerous times on the same terms. Don’t accept “it’s standard” as a reason to include a contract term. You’re negotiating a contract. It’s only standard if you agree that it is standard. Push hard for what you need in the contract, while factoring in business practicalities where necessary.
The information herein is not legal advice and does not create an attorney/client relationship. The information is in the form of legal education and is intended to provide general information about the matter. The above is not, nor is it intended to be, legal advice. Consult your attorney with questions.