By Leta Gorman
Laws pertaining to the enforceability of contracts (written and electronic) are ever changing. In Oregon, statutes applying to businesses and their operations and contracts are regularly revised by the Oregon legislature. The Oregon Court of Appeals and Supreme Court also regularly issue opinions that may affect your business and the interpretation and enforceability of standard contract clauses. To manage your business’s risk, regular review of the language in your standard contracts (including invoices, purchase orders, etc.) is critical to ensure the contracts adequately protect your business.
Based on my business litigation and trial experience, the following are my top ten contract clauses that should be reviewed regularly for compliance with local laws and enforceability:
(1) Indemnification: Does your contract contain an indemnity provision and does the language in this provision comply with local law? What do the laws in the places you do business say about allowable circumstances for indemnity? Does your contract language comply with that requirement? You may think you are covered if another party breaches the contract and causes damage to another, but if the contract indemnification clause is not enforceable, you could be held liable for damages caused by others.
(2) Attorney Fees and Costs: Does it make sense for your business to include an attorney fee and costs provision? If so, does the provision cover fees and costs on appeal? Some jurisdictions do not allow a prevailing party to recover fees and costs on appeal unless the contract specifically indentifies “fees and costs on appeal.”
(3) Waiver of Remedies and Warranties: Does your contract seek to have the other party waive certain legal remedies and/or warranties? If so, are these contract provisions sufficiently “conspicuous” to be enforceable? Most jurisdictions require a knowing waiver of rights, including remedies and warranties, and thus contracts that seek to eliminate another party’s right to certain remedies and warranties must be written in such a manner as to be conspicuous. Ways to make text conspicuous include USING ALL CAPS, using different fonts, underlining the text, using different color fonts, bolding the text, and the use of headings. Consultation with a lawyer regarding what constitutes conspicuous is important as every circumstance is different.
(4) Clear and Concise: Does your contract contain legalese? Is it drafted with plain English and in a clear and concise fashion? In my opinion, the days of using legal jargon are over. Your contracts should be organized with clear headings and paragraphs. Clean, clear, and unambiguous language should be used to get your intent across. If your contract language is unclear, a court is likely to interpret it against you.
(5) Dispute Resolution: If a dispute arises, do you want to try to resolve it through mediation and arbitration, or do you want to go to trial? Is there a specific mediation or arbitration service you want to use, or do you want a jury trial? You need to consider the potential disputes that may arise in your business and whether it would be better to have a judge, jury, or arbitrator decide the outcome. Discussions with an attorney can help you analyze the best method for dispute resolution for you and your business.
(6) Assignment: An assignment of a contract takes place when one party to the original contract (the “assignor”) gives the contract’s obligations and benefits to another party (the “assignee”). Often times, the assignor wants the assignee to take over the assignor’s contractual obligations and rights. If you agree to allow the contract to be assigned to another party, you need to consider if there should be any limits on assignment. Do you want to require the consent of any other party to the original contract? Do you want to include language regarding the liability of the assignor after assignment occurs?
(7) Choice of Law and Jurisdiction: Do you do business in multiple states and/or countries? What law do you want to apply if you are sued in a state or country outside of your home state or country? Consider whether you want or need different contracts for every place you do business. In addition, if you are sued, where do you want the mediation, arbitration, or lawsuit to be resolved? For example, if you are located in Oregon but do business in New York do you want to have your case tried in New York state courts?
(8) Standard of Care: Depending on the laws in the state in which you do business, a party may be prevented from pursuing both negligence and breach of contract claims against you for the same damages. Some states will not allow a negligence claim if the contract at issue incorporates a “negligence” standard of care. If this is the case, if a party breaches the “negligence” standard of care, the party can only sue for breach of contract. Knowing what the laws are in the jurisdictions in which you do business is critical to limiting the claims that can be used against you.
(9) Statute of Limitations: How long a party has to sue another party is generally defined by statute. If you wish to alter the time frame for asserting certain claims, you should consider what language to include in your contracts to address this issue. Moreover, when that time begins to run should also be addressed. For example, how much time does a party have from the time of payment, sale, completion, etc., to be able to file suit if something goes wrong?
(10) Fairness: Courts are loathe to enforce contracts that are so one sided as to be considered unconscionable. In addition, despite the language in any contract, most states incorporate a duty of good faith and fair dealing into the interpretation and enforcement of every contract. Your contracts should be reviewed to ensure they are in good faith and fair dealing so that they are not interpreted as overly one-sided or unconscionable and therefore determined as unenforceable.
Your contracts should be reviewed at least every two years and updated as appropriate for changes in the law and your business. The time and expense incurred today has the potential to save you hours of time and thousands of dollars in the future.