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The Fine Print of Business Contracts – What You Don’t Know Can Hurt You

John J. Laubmeier

May 1, 2014

Your business is presented with many contracts. These contracts include leases, purchase orders, service contracts, loan documents, license agreements and rental agreements. At the time that the contract is presented, the primary focus is typically on (1) the product or service that will be received and (2) the price. However, business contracts contain many other important terms that can significantly impact your company’s legal rights. The law will presume that you have read and understand the entire contract, so it is critical that you do so. What follows are some examples of common contract provisions to be on the alert for and to fully understand prior to signing any contract:

Automatic Renewals.This Agreement will automatically renew for one year unless terminated in writing at least 90 days prior to the end of the initial term.” If your company is presented with a contract for a specific term, it may contain a provision automatically renewing the contract for another term unless terminated in writing by a specific date. This creates a problem if your company, focused on the termination date in the contract, misses the deadline to cancel prior to the automatic renewal. Automatic renewal clauses can force your company into another term of a contract that it did not expect or desire.

Choice of Forum and Choice of Law.Any dispute between the parties shall be governed by New York law, and any litigation between the parties shall occur in the Southern District of New York.” If your company is contracting with an out-of-state party, the contract may contain a choice of forum and choice of law clause. These clauses specify the law to be applied and jurisdiction for any dispute, typically the location of the seller, and waive your right to litigate in Wisconsin. Litigating a dispute in far-away jurisdiction can be very costly and time consuming.

Attorneys’ Fees.Buyer shall be liable to Seller for all costs and attorneys’ fees reasonably incurred by Seller in enforcing this Agreement.” In a typical lawsuit, each side must pay its own attorneys’ fees, regardless of who wins. An exception to this rule is if the parties otherwise agree by contract. Contracting to pay attorneys’ fees in the event of a dispute can significantly raise the stakes in litigation. Some contracts even contain “one way” attorneys’ fees provisions; i.e., your company agrees to pay the other side’s attorneys’ fees in litigation, but not vice versa.

Arbitration. “The parties agree that any dispute shall be subject to final and binding arbitration.” The contract may provide that the parties submit to binding arbitration in the event of a dispute. By doing so, your company agrees to the appointment of a neutral third party to adjudicate a dispute instead of a judge or jury, and waives its right to proceed in court. In theory, arbitration is faster and cheaper than proceeding in court. However, in practice, this is not always the case, especially with relatively minor disputes. In addition, by submitting to arbitration, your company is waiving any substantive court review of the arbitrator’s decision.

Incorporated Documents.The Terms and Conditions available at www.sellerswebsite.com are incorporated by reference herein.” A one-page contract that may seem simple on its face can incorporate by reference other documents that become part of the contract. The incorporated documents are not always provided with the contract and may include many terms that are disadvantageous. It is important to read and understand any and all documents that are incorporated by reference into the contract presented.

Personal Guarantees. The undersigned personally guarantees Buyer’s performance obligations hereunder.” If you are entering into a contract on behalf of a business that you own, the contract may provide for a personal guaranty. The personal guaranty will include a separate signature block for you to personally sign. By personally guaranteeing the contract, you place all of the assets that you personally own at risk in the event of a dispute or non-payment. Personal guarantees of business contracts should be avoided if at all possible.

Investing time to fully understand a contract prior to signing can prevent significant future problems. Oftentimes, problematic provisions can be revised or removed by negotiation. If a contract with problematic provisions is presented to your company on a “take it or leave it” basis, the best course of action may be to walk away and look elsewhere for what your business needs.

If you have any questions about how the information in this article may affect you or your business, please contact John Laubmeier at jlaubmeier@stroudlaw.com or (608) 257‑2281 or your Stroud attorney.


DISCLAIMER: The information in this article is provided for general informational purposes only, is not necessarily updated to account for changes in the law, and should not be considered tax or legal advice.  This article is not intended to create, nor does the receipt of it constitute, an attorney-client relationship.  You should consult with your own legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.