Contract documentation is another way to minimize risk. Whether it is a core business contract or the construction of a personal residence, most contracts understandably focus on price and payment terms, but the other “boilerplate” provisions are equally important. Every month we prepare or review contracts that attempt to shift the responsibility from one party to another. Buried in the fine print are often carve outs or limitations that substantially limit your remedies. Slight wording changes can often make a significant difference. Let’s review a couple of these important provisions.
Releases, limitations of liability and indemnification provisions.
These provisions often provide the shield that protects you from liability or at least reduces the potential for an adverse claim. These terms can also effectively shift responsibility for claims to you or the other party and minimize the effect of a problem. A release is where one party contractual relieves another for a particular liability. Releases can be broadly or narrowly drafted and should be reviewed carefully to insure there are not carve-outs or limitations that reduce the benefit you bargained for. Limitations on liability are enforceable in certain situations. These provisions limit the liability under the contract to certain acts, a stated sum or period of time. Any claims for other acts, an amount over the stated sum or beyond the term are excluded, resulting in the shifting of the liability back to the other party. An indemnity provision provides that one party indemnifies another for certain claims. Similar to releases, they must be carefully reviewed to insure it does not contain unreasonable carve-outs or limitations. Indemnification provisions are complicated and should be carefully reviewed.
Damages, termination and default provisions.
We also spend a lot of time on the appropriateness of damages and termination provisions, carefully delineating what constitutes a default and when termination is for cause or without cause. These provision can become invaluable to get you out of a contract with an under performing party and clarity if the event is addressed in the agreement. In one instance we reviewed a contract for a client and found a remedy for delays that they did not know they had under a contract. While this client was compensated for the delay, others have not been so lucky because the contract was silent on the issue. Failure to address these items up front can create uncertainty and increase the likelihood of protracted litigation if the other party disagrees with your position.
Lastly, properly drafted dispute resolution provisions can resolve costly questions over the applicable law, venue and forum. Before you even get to the merits of the case, tens of thousands of dollars can be spent arguing, if not litigating, over where the dispute should be heard and which law applies. Setting forth a process for resolving disputes in advance can get parties talking early and often about the merits of the case in an effort to find a mutually agreeable solution.
Contracts have important legal consequences and offer some asset protection. For businesses, contract forms evolve over time and some provisions may get dropped or modified so that they are not effective as could be. We recommend having your core contracts reviewed to insure they adequately protect you and your business and if a situation arises, have the contract between the parties reviewed before you take action. Similarly, individuals entering into a large purchase contract should have that “form” document reviewed to insure they are adequately protected if the deal goes sideways or a party fails to perform. While it may slow down the process, having adequate contract protection can significantly enhance your chances of recovering if the deal goes bad.
.For a description of other important defense strategies see the post protecting family assets here.