By Derrick K. Galantowicz, Esq.
Business owners deal with a variety of contracts in the course of their operations. Most focus on the main terms in a contract, such as what’s being purchased, payment terms, and timing considerations. However, certain contractual provisions with serious legal implications appear frequently across various types of contracts and are commonly overlooked. Following is a discussion of a handful of these contractual provisions and their implications, emphasizing their practical and legal significance.
Indemnity Clauses
The indemnity clause of a contract allocates risk among the contract’s parties, sometimes assigning all risk to a single party. An improperly drafted indemnity clause can cause unintended liability for a business owner or a lack of protection against certain claims. For example, in a business sale contract, a buyer will want the seller to indemnify the buyer for causes of action against the business that arose due to the seller’s previous operation of the business. An unclear, poorly written indemnity clause could lead to the buyer’s being liable for the past actions of the seller, or vice versa.
Representations and Warranties
Indemnity clauses can also provide indemnification for breaches of the representations and warranties contained in the contract. Depending on the transaction, these representations and warranties can comprise a significant portion of a contract. Generally, they are statements of facts and assurances made by a party, such as the condition of an asset or any outstanding liabilities. Business owners need to ensure these statements are accurate as they relate to their business, or they can find themselves quickly in breach of the contract. Precise drafting is key to limit liability exposure and to avoid ambiguity.
Termination and Notice Requirements
Termination and Notice Requirement clauses provide the conditions under which a contract may be concluded. These provisions can assist with the timing expectations of the contract and provide straightforward remedies in case of a breach of the contract. By providing clear language regarding the amount of notice required and when a party has a right to cure any breach, these clauses can avoid disputes over whether a party’s actions constitute a breach and whether the contract can be validly terminated.
Conclusion
Common contractual provisions provide essential language for both managing the contract and mitigating the involved parties’ risks. However, their implications can extend beyond the mere formality many people view them as. Careful drafting and negotiation of these provisions are necessary to ensure they reflect the parties’ intentions and leave no ambiguity about the risks and responsibilities each party agrees to.
