We are back to finish up our list of top ten commercial contract terms that middle-market companies should negotiate, which we started in Part I and Part II. These commercial contracts terms are ones that are commonly overlooked but very important.
#7 – Governing Law and Venue
The governing law provision will determine what law will be used to interpret the contract. Please don’t use the law of a jurisdiction that has nothing to do you with the contract or any of the parties to the contract. It will not be enforceable.
In certain situations, the choice of governing law may have important implications. The importance of the governing law provision depends on the type of contract being negotiated and certain provisions that may be included in the contract. For example, a company that wants an employee to agree to a non-compete likely wants the laws of a state other than California to apply, which may be difficult in some situations. Often, a company based in California cannot select the law of another state to govern a non-compete. That being said, at times, even a company based in California could get away with it but, hopefully, you don’t get yourself in trouble with an unenforceable non-compete for a California employee.
The venue provision will determine where a party to the contract can be sued by the other party. If you love traveling to remote places or someone else’s home field, then feel free to ignore the venue provision. Otherwise, make sure that you agree to a venue provision that is convenient for you and makes sense from a legal perspective. Also, remember that the parties cannot select just any venue – it must be one permissible under applicable laws. You always have the option of not including a venue provision, in which case the party commencing the lawsuit can, subject to certain legal limitations, file the complaint anywhere.
#8 – Assignment
The assignment provision in a contract will either permit or not permit one or both parties to transfer the contract to an unrelated party. If the contract says nothing about an assignment, then it can be transferred to another party. The key thing to keep in mind is that you always want to have the right to transfer the contract to an affiliated company or when you sell the company. If you do not negotiate for that right, which is typically not difficult, then you limit your rights down the road in ways that can be costly.
Don’t let fancy lingo trip you up. You may see references to both “assignment” and “change of control” in the contract. They have different meanings. An assignment means that the company directly transfers the contract to another party. A change of control means that someone who controls the company transfers his or her ownership in the company. Only under limited circumstances, such as when a company is essentially a one-man (woman?) show and the other party needs that person to be involved, would it make sense to have a change of control provision. If you are that one person, then avoid agreeing to it.
#9 – Attorneys’ Fees
The attorneys’ fees provisions is a two-edged sword – a sharp and potentially expensive sword. An attorneys’ fees provision will typically state that the person who loses litigation over something in the contract will pay the attorneys’ fee of the other person (in addition to other costs incurred). If that provision is not in the agreement, then each party, regardless of who wins the litigation, will pay for his or her own fees. Since we assume that all our readers and clients are awesome, perfect people who would never do anything wrong, we recommend including an attorneys’ fees provision in all your contracts.
#10 – Entire Agreement
The entire agreement provision (also referred to as an integration provision) is maybe the most boring of all provisions in a contract. However, it is important. Most people think that getting an email or verbal commitment from another party to a contract is meaningful in court but that is rarely the case. The purpose of the entire agreement provision is to address that exact situation and ensure that a court will not look at any communications (whether in writing or orally) that occurred before signing the contract. The email that you were so happy to receive is of no value! Most contracts have entire agreement provisions. Therefore, make sure that any agreement you have with another party ends up in the contract.
So, has our three part series on the top 10 commercial contract terms to negotiate taught you anything?