Common Contract Clauses That May Affect Your Business
As a business owner, you have likely signed many contracts regarding operating your business. It is also possible that you didn’t read some of them or even if you read the document, you did not consult an attorney to assist you in interpreting or negotiating an arrangement. This article is not an attempt to persuade you to use an attorney. It goes without saying that as attorneys, we would always recommend obtaining legal advice prior to signing a legally binding contract. Instead, this article is to provide you with some general information regarding common contract clauses that may appear in contracts you sign.
Notice. A notice provision in a contract typically provides the address or location of where one party to the contract notifies the other party. Making sure your address is correct and notifying a party if a future change of address occurs is important. Additionally, these clauses define how notice is to be given, for example, hand delivery, certified mail, overnight courier or electronically. A notice provision typically must be carefully followed if a complaint or other dispute arises regarding the contract.
Severability. A severability clause provides that if a clause in a contract is illegal or unenforceable, then the remainder of the contract can remain valid. For example, after a contract is entered into, one party may learn that the interest charge on late payments is greater than the amount permitted by law, so the attempt to collect the interest may be unenforceable. However, the actual amount due under the contract would remain enforceable if the contract contains a severability clause.
Governing Law. In the United States, some contracts are interpreted according to state law and some federal law. If the contract is governed by state law, the contract may contain a clause identifying which state’s law applies. We often see clients in Indiana being asked to sign a contract that contains a clause saying the contract is governed by New York law. That happens especially when a vendor’s business headquarters is located in another state. Each state has its own laws describing how a contract is to be applied and may identify parts of a contract that are illegal. The laws in Indiana may result in a contract being interpreted one way and the laws of New York another way. It is important to understand, if the contract contains a governing law clause, which state’s laws apply if a dispute arises regarding the contract.
Venue. A contract that contains a venue clause may contain language, for example, that says venue for all purposes is federal or state courts in Lake County, Indiana. What that means is that if there is a dispute regarding the contract, like the vendor didn’t perform or the customer didn’t pay, and a court is needed to enforce the contract, the lawsuit would have to be filed in a court in Lake County Indiana. That generally is a good thing for a business operating in Lake County Indiana. However, if that business operating in Lake County Indiana signs a contract that indicates venue is Broward County, Florida, that could create challenges. Finding a lawyer in Florida and traveling to Florida for litigation may be difficult and create hardships for the Indiana company if a dispute arises in regard to the contract.
Time is of the Essence. A time is of the essence clause generally means that if there are deadlines set up in the contract, the parties need to comply with them. So, even when a party explains they will be late in providing services, a time is of the essence clause can be interpreted to mean that late performance is a breach of the contract and grounds for termination or the right to recover damages.
Binding Arbitration. A binding arbitration clause may result in a requirement that the parties settle any dispute related to the contract in binding arbitration and could only ask the courts for assistance if the arbitration award needs to be enforced against a party. Arbitration requires the appointment of one or more arbitrators, depending upon the rules of the contract or the agency that is used to provide the arbitration services. In addition to payment of legal fees and expenses relating to resolving the dispute, the arbitrators charge fees which need to be paid by one or both of the parties. Additionally, rules regarding evidence and argument may be different in arbitration as compared to courts. If you prefer using a court and judge to resolve a dispute, you will want to avoid including a binding arbitration clause in a contract.
Limitation of Liability or Damage Caps. Many vendors include a limitation of liability or damage caps. These clauses vary. One example would be for a vendor to include a clause that it is only liable for failed performance if it acted recklessly. So, if the vendor was merely negligent, a customer may be prevented from obtaining reimbursement for damages caused by the negligence. Another clause a vendor may include would be one that limits any damages to a specified amount or to payments made by the customer under the contract. So, if the customer paid $25,000 under the contract, but the vendor caused $50,000 in damages, a clause capping the damages could limit recovery to $25,000, even though the damages were in excess of that amount.
The above are just a few of the contract clauses that as a business owner you may encounter. This article does not constitute legal advice nor does it establish an attorney/client relationship. Should you have specific questions regarding the above, please contact Bonnie C. Coleman or Shawn D. Cox at Hodges and Davis, P.C.