“Legal mumbo jumbo.” That’s what one of my clients calls most of the non-deal points of contracts. After we gleefully dance through all the fun business stuff - the things that make entrepreneurs light up - we invariably come to the buzz kill part of the meeting, where we have to talk about indemnity and survival periods. I hate to see his enthusiasm die, but even he knows these “boring” parts of each contract matter. If something goes wrong the “boring” stuff is where lawyers go first to assess your rights and remedies. This article looks at five “form” or “boilerplate” provisions you overlook at your own peril.
Indemnity and Insurance. These two provisions really go hand in hand. Simply put, an indemnity provision allows one party to be reimbursed or covered for claims it is forced to pay as a result of an injury caused by the other party to a contract. Insurance is one way for you to know if the other party has the means to defend a lawsuit or pay a judgment. If there is no insurance to cover the risk, that means that promise of indemnification is worth very little. Generally, I advise my clients that indemnity clauses should run both ways. This means you should be willing to cover any mistake your business makes in the course of a relationship and the other party should be willing to cover any mistake it makes. Push back hard if the contract makes your business responsible for the other business’ actions or omissions. Intellectual property rights should be separately indemnified. On the insurance front, make sure the contract covers the different types of coverage needed (CG & L, professional liability, driver policies, etc.). You can – and should - ask to be added as an additional insured onto the other party’s policy.
Alternative Dispute Resolution. I am a big believer in alternative dispute resolution. In fact, all the contracts I draft for clients use a three tier approach: (1) informal resolution at the business level first; (2) mandatory early mediation next; and (3) arbitration or litigation only after (1) and (2) have been exhausted. You can carve out certain claims that allow you to seek injunctive relief if necessary. This is critical when you are dealing with intellectual property. You want to get into court fast before damage is done to your R &D, brand or product.
Choice of Law/Choice of Venue. There is a reason that lawyers go to the mat on this. Typically buried in the back of the contract, this section lets a business know ahead of time which state’s law applies in the event of a dispute and where you have to file it. For example, if you are an Arizona-based business, there is very little reason to allow a choice of law elsewhere. Not only would this increase your costs in the event of a dispute, but it also increases legal uncertainty. If that doesn’t work though, try a neutral location so no one has what is referred to as a “home court” advantage. Each state has a unique set of laws, so your best bet is to stay where you live.
Termination. A termination provision sets out how the parties “unhook.” The more specific you can make this the better, so there is no confusion. Also, if you have given the other party “rights” to intellectual property during the term of the contract, spell out what happens when the relationship is over. Typically, for example, the use of trademarks should cease immediately.
Assignment/Modification/Integration. Do you want to be able to assign the contract in the event of a sale of your company—or to help facilitate a corporate reorganization? Many contracts have a blanket prohibition on assignment so that you could not take these steps automatically. The same goes for modification of the agreement. Typically, contracts require any change (modification) to be in writing. Finally, it is prudent to make sure that the contract specifically incorporates all the separate schedules as part of the agreement, and that oral negotiations are trumped by the writing.