Because we are lawyers and write too much (you should not have expected anything else from us), we could not finish our list of top ten commercial contract terms to negotiate in Part I. So, we are back with more.
#4 – Indemnification
After the business terms, the indemnification provisions in your contract may be the most important provisions in your contract. When you agree to indemnify the other party, you are telling that party that you will reimburse him or her for money coming out of his or her pocket because of something that you or another party has done or failed to do.
Although indemnification provisions can be drafted in many ways, they are generally very broad and cover any “losses” that are in any way connected to your contract. The indemnification provisions typically also include a requirement that you defend any claim that may result in your obligation to reimburse the other party. Your goal is to:
- limit the amount of your liability (commonly by stating that you will never need to pay the other party more than a percentage of fees received from that party);
- limit the type of liability (by stating that you will not need to reimburse the other party for any indirect, consequential, incidental, punitive and special damages, including lost profits, lost revenues, diminution in value, etc.);
- limit the other party’s time to ask for reimbursement (commonly by requiring that they ask within a set period of time); and
- give yourself the right to defend against and settle a claim of a third party (rather than letting the other party choose how it wants to defend a claim or for how much it settles a claim, for which you will be reimbursing the party).
#5 – Failure to Live Up to Contract
All the most favorable provisions to you in a contract will do you no good if you cannot do anything about the other party’s failure to live up to the terms of the contract. You want to leave yourself with options if the other party does not live up to expectations. Of course, you may not actually use any of those options if the relationship with the other party goes bad but it is still beneficial to have options because it gives you leverage out of court to reach an agreement with the other party. If it turns out that the other party’s actions did harm you significantly, then you will be happy to be able to do something about it.
You want to keep an eye out for anything that will limit the amount of money you can recover from the other party. Similarly, you would want to ensure that you are not only prohibited from collecting money from the other party in a manner not specified in the contract, which may be referred to as the “sole remedy” or “exclusive remedy,” or waive your rights to certain types of payments to which you may be entitled, which may be referred to as a waiver of “consequential damages,” “special damages” or “incidental damages.” If the other party breaches a confidentiality provision, then you want to have the right to get a court to force the other party to stop sharing confidential information rather than being limited to the unsatisfactory rights in the contract.
#6 – Termination
Consider what society would be like if you could get married but could not get divorced and begin having screaming matches with your spouse multiple times a day. It would be equally disastrous (alright, maybe a little less than equally disastrous) for a party not to give himself or herself an out when a contractual relationship worsens. So, say hello to the termination provision.
The termination provisions in a contract will set out the circumstances when you or the other party has the right to end the relationship. Your primary concern is making sure that the other party cannot end the relationship at any time, for any reason, and to make sure that you have that right if you expect to have it.
After you have overcome your primary concern, you should keep an eye out or negotiate for other common termination triggers:
- a breach of the contract (though you may want to limit it to material breaches and consider a parties right to fix the breach);
- insolvency; and
- failure to achieve targeted milestones.
Regardless of your right to terminate the agreement, the relationship you have, including any future dealings you expect to have, with the other party should drive whether those termination provisions are ever put to use.