The Devil's in the Details — The Significance of Your Contract's Fine Print
Many people enter contracts on behalf of their business without paying too much attention to much of the language in the agreement they are signing. A typical contract review focuses on particulars related to the deal—for example, the price, the date for performance, and the services, products, or materials purchased. Often, the general terms and conditions (“GTCs”) of the agreement are quickly examined or overlooked completely.
A limited evaluation of the GTCs normally does not end up being a problem, because each party performs their end of the agreement, and the contract ends successfully. However, if things go awry, the GTCs can significantly impact the outcome of any related dispute. To keep yourself from navigating troubled waters only after things have soured, it’s a good idea to understand some fundamentals of GTCs.
To assist in this endeavor, the information below includes an explanation of some common provisions found in GTCs, some of the issues to consider in deciding whether to include or amend such provisions, and draft language that can be used as a starting or comparison point when preparing or revising such clauses. When evaluating GTCs, it is important to keep in mind that whether and to what extent these clauses are enforceable depends on the law governing the agreement, and to work with your attorney to tailor GTCs.
Attorneys’ Fees
An attorneys’ fees provision can upend the bargaining position of parties in a dispute. This scenario intensifies when the amount in controversy decreases because attorneys’ fees can equal or exceed the claimed loss. When negotiating this clause, a major consideration is its ultimate implications; for example, if you are more likely to be sued because of a contract breach, you may want to exclude the clause or make it as limited as possible.
Sample language: If any party institutes any legal suit, action, or proceeding against the other party to enforce the covenants contained in this Agreement or obtain any other remedy in respect of any breach of this Agreement, the prevailing party in the suit, action, or proceeding shall be entitled to receive, in addition to all other damages to which it may be entitled, the costs incurred by such party in conducting the suit, action, or proceeding, including reasonable attorneys’ fees and expenses and court costs.
Governing Law
A governing law provision allows parties to select which state law controls how a contract will be interpreted, which limits controversies and decreases costs that might otherwise be expended in determining which law applies. When determining which state law to specify, you should think about the location of the parties and the transaction. It is often advantageous to choose the state of your location because your attorney is likely more familiar with the laws. Other pertinent issues include which state has the most developed or favorable relevant laws.
Sample language: This Agreement and all related documents and all matters arising out of or relating to this Agreement, whether sounding in contract, tort, or statute, are governed by, and construed in accordance with, the laws of the State of Texas, without giving effect to the conflict of laws provisions thereof to the extent such principles or rules would require or permit the application of the laws of any jurisdiction other than those of the State of Texas.
Submission to Jurisdiction
While related to and often combined with a governing law provision, rather than specifying which state’s law applies, a submission to jurisdiction clause allows parties to choose where a claim can be brought. In determining which jurisdiction to specify, be sure to keep in mind that it is usually more convenient and cheaper to choose a nearby location as the relevant jurisdiction.
Sample language: Any legal suit, action, or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby shall be instituted in any United States federal court or state court located in the State of Texas in the City of Austin and County of Travis, and each party irrevocably submits to the exclusive jurisdiction of such courts in any such suit, action, or proceeding. The parties irrevocably and unconditionally waive any objection to the laying of venue of any suit, action, or proceeding in such courts and irrevocably waive and agree not to plead or claim in any such court that any such suit, action, or proceeding brought in any such court has been brought in an inconvenient forum.
Waiver of Jury Trial
The unknowns of a jury can significantly affect the cost of litigation and settlement. To decrease the likelihood that a case will be decided by a jury of people who may not fully understand the complexities of your case, you may want to include alternative dispute resolution language, such as mandatory arbitration or a jury trial waiver. You may need to format any such clause in a prominent manner to prevent a party from later claiming they were unaware of the waiver language and to increase the likelihood that the provision will be enforced.
Sample language: EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY THAT MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES AND, THEREFORE, EACH PARTY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LEGAL ACTION ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. EACH PARTY TO THIS AGREEMENT CERTIFIES AND ACKNOWLEDGES THAT (A) NO REPRESENTATIVE OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT SEEK TO ENFORCE THE FOREGOING WAIVER IN THE EVENT OF A LEGAL ACTION, (B) SUCH PARTY HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (C) SUCH PARTY MAKES THIS WAIVER VOLUNTARILY, AND (D) SUCH PARTY HAS DECIDED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.
Force Majeure
One of the many impacts of COVID-19 included an immediate and ongoing evaluation and revision of force majeure (literally, “greater force” in French) clauses, provisions that specify what happens when performance of a contract is no longer possible for unforeseeable reasons. When drafting and negotiating the language of a force majeure clause, think about whether the clause should apply to all parties, whether payments should be excluded (i.e., whether payment is required regardless of a calamity), and whether termination should be required or allowed after a certain amount of time of nonperformance.
Sample language: No party shall be liable or responsible to the other party, nor be deemed to have defaulted under or breached this Agreement, for any failure or delay in fulfilling or performing any term of this Agreement (except for any obligations to make payments to the other party hereunder), when and to the extent such failure or delay is caused by or results from acts beyond the affected party's control, including, without limitation: (a) acts of God; (b) flood, fire, earthquake, or explosion; (c) war, invasion, hostilities (whether war is declared or not), terrorist threats or acts, riot, or other civil unrest; (d) government order or law; (e) actions, embargoes, or blockades in effect on or after the date of this Agreement; (f) action by any governmental authority; (g) national or regional emergency; (h) strikes, labor stoppages or slowdowns, or other industrial disturbances; (i) epidemics, pandemics, or quarantines; (j) failure of a power grid or the internet; or (k) shortage of adequate power or transportation facilities (each a “Force Majeure Event”). The party suffering a Force Majeure Event shall give notice (within ten days of the Force Majeure Event) to the other party, stating the period of time the occurrence is expected to continue and shall use diligent efforts to end the failure or delay and ensure the effects of such Force Majeure Event are minimized.
Entire Agreement
Parties often spend a great deal of time negotiating a deal before executing a contract that memorializes the agreement. To ensure that the parties have a true meeting of the minds related to the specifics of the transaction, contracts often stipulate that language that is not within the contract is not part of the agreement through an entire agreement clause. When including or reviewing an entire agreement provision, you should be mindful of any ancillary agreements and amend the entire agreement provision as appropriate.
Sample language: This Agreement constitutes the sole and entire agreement of the parties to this Agreement with respect to the subject matter contained herein, and supersedes all prior and contemporaneous understandings, agreements, representations, and warranties, both written and oral, with respect to such subject matter.
Severability
Specific clauses within any contract may be interpreted differently by certain courts and jurisdictions and may even be found unenforceable due to nuances in the jurisdiction or changes in the law. In such circumstances a severability clause can save the contract by removing or modifying any objectionable language. When preparing a severability clause, an important issue to determine is what you would like to happen if any clause is found to be invalid—do you want it modified or removed?
Sample language: If any term or provision of this Agreement is invalid, illegal, or unenforceable in any jurisdiction, such invalidity, illegality, or unenforceability shall not affect any other term or provision of this Agreement or invalidate or render unenforceable such term or provision in any other jurisdiction. Upon such determination that any term or other provision is invalid, illegal, or unenforceable, the court may modify this Agreement so as to effect the original intent of the parties as closely as possible in a mutually acceptable manner in order that the transactions contemplated hereby be consummated as originally contemplated to the greatest extent possible.
Next Steps
While the information in this document highlights some common GTCs and some related considerations, there are many others, and it is important for business owners to be acquainted with them and to understand how they could impact their company. Taking preventative action now can give you immediate peace of mind as well as save you from considerable difficulty and expense in the future.
Practical next steps include reviewing these terms on your standard contract templates and determining whether it makes sense to prepare standard amendment language if you often sign agreements based on the standard agreements of other parties. Also, if at any point you do not understand the purpose or importance of a certain clause within any contract’s GTCs, be sure to seek appropriate guidance and support from your attorney.
This update is for informational purposes only and does not provide legal advice. Every legal situation is different and must be independently analyzed by an attorney. Please consult with an attorney for specific guidance.
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