No contract can effectively bind a dishonest person. So, a contract’s primary function is to ensure both parties understand the deal. You want to ensure the deal is stated clearly enough that both parties can understand it.
There is no way to guide you regarding the intricacies of every contract you may encounter. The greater the contract’s potential financial impact, the more likely you should have an attorney review it.
A. PARTIES
1. Does the contract properly identify the parties to the contract? If a party is a New Mexico corporation or limited liability company, check the Secretary of State’s website to ensure the corporation exists and is in good standing. There is no expiration period for limited liability companies, so there is no concept of “good standing.” But you can check to see if it exists. Here is the link to the website: https://enterprise.sos.nm.gov/search/business
3. If you’re dealing with a licensed contractor, do they have a license and is it current?https://public.psiexams.com/search.jsp
There is only one type of licensed contractor. A licensed contractor can do any type of work if they have a qualifying party who holds a qualifying party certificate in the field, such as plumbing or electrical.
B. WHAT’S THE DEAL?
1. What’s the deal? The heart of most contracts is that one party agrees to something, and the other party agrees to pay something. You will often find this in paragraphs labeled something like “Scope of Work/Services to be done” or “Sale.”
2. The payment section will usually be labeled “Price and Payment” or something like that. How much is to be paid and when? Does the contract require a specific method of payment? Are payment due dates specified? I have lately seen some subcontractor contracts in which the subcontractor doesn’t get paid if the contractor doesn’t get paid. Do you really want to agree to that.
3. Is the deal explained in clear and unambiguous language? Ambiguous language often results in each party thinking the deal is something different than what the other party thinks.
4. The management issue is evaluating whether this is a good deal.
C. INDEMNITY
1. Just about every contract today contains an indemnity provision. This is the most dangerous part of the contract and is typically the most difficult to understand. And most people skip over it because it’s hard to understand. Sometimes, the language used instead of “indemnity” is “hold harmless.” They both mean essentially the same thing.
2. An indemnity means that if something goes wrong, one of the parties will pay the other party for the harm and losses incurred. Sometimes, there are mutual indemnities, that is, each part is protected from certain things.
3. If the contract has a big financial impact, you ought to have an attorney review the indemnity provision.
4. Indemnification is the right of one party who is legally responsible for a loss to shift that loss to the other party. For example, in real estate escrow agreements, the escrow company often requires that if they are joined in a lawsuit over a real estate contract escrowed with them, they have the right to be reimbursed for all their legal costs in responding to the lawsuit.
5. Understanding an indemnity agreement is the most important part of evaluating it. If the contract isn’t clear about which party is indemnifying the other and what event or circumstance will trigger the obligation to indemnify, then the first thing that must happen is for the language of the indemnity to be clarified.
6. Once you understand who and what is being indemnified, you need to determine how likely it is that the indemnification event will occur and how much it will cost to indemnify. Then, you must balance that likelihood against the profit or benefit you derive from the overall contract. The greater the profit and the less likely the indemnification event will happen, suggests this could still be a good deal even with the indemnity provision. On the other hand, an indemnity event that is likely to occur doesn’t make good business sense if the profit margin in the contract is thin.
D. FORCE MAJEURE
1. What we call “Force Majeure” clauses have been a part of contract law since the Norman (like Normandy in France) invasion of England, from where we get our common law. The term is translated as “superior or overpowering force.”
2. The effect of a Force Majeure provision is to provide that if the obligation to comply with the contract is obstructed by a cause outside the party’s control, then the contract is no longer enforceable, and there is no penalty. These provisions were often called “acts of God” and referred to things like tornadoes, hurricanes, and earthquakes.
3. Here in New Mexico, as compared to states with regular natural disasters, such provisions existed but were rarely needed. But COVID-19 introduced an entirely new consideration. What about pandemics which disrupt supply chains and affect the manpower needed to get a job done? You can be sure there were a lot of lawsuits regarding that.
E. MODIFICATIONS AND AMENDMENTS
1. Most commercial contracts have a provision for modifying or amending the contract. These are very important in contracts in the construction trades. One of the most common disputes between a contractor and an owner happens when the owner makes oral changes to the contract that require a price or completion deadline change. When the contractor makes the change, the owner often seems to have “forgotten” the modification’s result on price or completion deadline.
2. If you’re dealing with a large organization, who has actual authority to approve an amendment or modification? If you’re dealing with a homeowner, who has the authority to modify the contract or approve a change order? Both husband and wife? Or just the one who signed the contract?
F. DATES
1. When does the contract become effective? Is there an “effective date,” and if so, when does it start?
2. Does the contract provide a deadline for work to be completed? Is the deadline reasonable? Are there things beyond your control that might make the contract difficult to complete on time? Are there penalties if you don’t complete the contract on time?
3. The law has a complex history regarding whether a time deadline is an essential part of a contract. Accordingly, the best practice if a time deadline is essential is to recite in the contract that “time is of the essence of this Agreement.”
G. REPRESENTATIONS AND WARRANTIES
1. Do the “representations” made in the contract conform to reality, that is, are they true?
2. I recommend not offering warranties unless you’ve had an attorney review them first. Many laws affect the warranties you must make or cannot make.
H. CONTRACT INTERPRETATION
1. Does the contract provide for its interpretation under the laws of a certain state?
2. Does the contract provide that disputes must be resolved in a certain state (jurisdiction) or a certain court (forum)?
3. Beware of the following terms that Courts may imply within a contract unless specifically modified in the contract.
A. Course of Dealing. Parties with a history of dealing with each other over several transactions may have established a “course of dealing.” A supplier’s past practice of rushing orders and waiving rush fees might become a “course of dealing” over time.
B. Course of Performance. Parties with a history of dealing with each other over several transactions may have established a “course of performance.” A party’s past practice of completing a job within 30 days of the due date with no objection and no penalty asked for by the other party may result in courts not enforcing the due date of the written contract.
C. Usage of Trade. A “usage of trade” is a practice uniformly employed in a trade or industry that is so common a court will not enforce a deviation from it that one party may complain about. Suppose you purchase ten “2 x 4” boards from the lumber store, and you’re unhappy when you get them to the job site because they are only “1 ½ x 3 ½.” In that case, a court will not consider the lumber store to have violated the contract because the longstanding practice in the lumber industry is that the nominal lumber size is not the actual lumber size.
I. INTEGRATION PROVISION
1. An “integration clause,” sometimes called a “merger clause” or “entire agreement” clause is a contract provision that states the written contract is the complete deal. Anything the parties may have said or represented about the deal before the contract is signed has no legal force unless included in the contract.
2. If other documents are essential to understanding the deal the parties make, these should be listed in the contract itself.
J. DISPUTE RESOLUTION
1. Does the contract provide where (city, state) disputes are to be resolved if there must be a hearing?
2. Does the contract require a certain mode of resolution? For example, does it prohibit jury trials or require mandatory arbitration?
3. Should the contract require an informal method of dispute resolution before final action is taken, such as “meet and confer” or mediation?
K. ATTORNEY’S FEES AND DISPUTES
1. The rule throughout all the states is that the prevailing party in a dispute is not entitled to recover their attorney’s fees in addition to their actual loss unless the award of attorney fees is provided for by statute or contract.
2. Therefore, if the other party breaches your contract and you want to be awarded your attorney fees in addition to your actual loss under the contract, your contract must provide for the award of attorney fees.
3. You should also include litigation expenses such as court filing fees, other court fees, court costs, arbitration fees and costs, witness fees, and all other fees and costs of investigating and defending or asserting any claim arising under or related to the contract, including the fees of other professionals.
L. DEFINITIONS
1. Some contracts define the meaning of the terms they use. Read these carefully because the word may not have its ordinary meaning.
2. Ideally, the definitions in a contract are all kept together. But sometimes, you find them scattered throughout the contract.
M. SEVERABILITY
1. A contract may sometimes contain a provision that a court refuses to enforce. A court will not usually enforce a contract that contains a provision that is immoral, prohibited by law, statute, or public policy. Courts often refuse to enforce any contract with such a provision, even if it only affects a minor part of the entire contract.
2. Contracts sometimes contain a “severability” provision that provides the contract will continue to be enforced even if a court declares one part of it to be unenforceable. But what if you don’t want the contract at all if a court determines that one portion of the contract is not enforceable?
4. I often ask my client to identify which portions of the contract are so essential to the deal you want that you wouldn’t want the deal at all if a court declared it unenforceable. Then, we modify the severability provision to exclude those provisions from the severability provision.
N. ASSIGNMENT
1. Contracts frequently contain provisions that either permit or prohibit the contract to be assigned. You must consider that there are two aspects to assignments: (1) the benefits of the contract, and (2) the burdens (performance obligations) of the contract.
2. Generally, you have an absolute right to assign the benefit you derive from the contract, but a burden can only be assigned if the contract permits it.
3. When dealing with a legal entity such as a corporation or LLC, beware of an assignment that may take place by simply changing the ownership of the company. Should that be prohibited?
O. CONFIDENTIALITY
1. Sometimes, one party to a contract wants certain information they disclose to the other party to the contract to be kept confidential. These tend to require legal assistance in proper creation and advice on proper implementation.
P. INTELLECTUAL PROPERTY
1. Intellectual property is the general term for intangible property created by the human intellect. Suppose you hire a company to create a logo for your company. Or suppose you ask an employee to create a logo for your company. Who owns the right to use the logo?
2. Beware of a company you hire to create IP (intellectual property) for you and terms in their contract which say they own the property they create.
3. In employment contracts, make sure you specify who owns the IP created by your employee.
4. Patents, copyrights, trademarks, and trade secrets protect certain types of IP.
BLSW has attorneys experienced in advising on intellectual property.
Q. IMPERFECTION
A contract in which you can negotiate exactly how you want it is a rarity, especially in this age of “contracts of adhesion.” These are contracts prepared by one party with superior bargaining power and offered solely on a take-it-or-leave-it basis. Think of your satellite or cable TV carrier. Or your cell phone service. Or even the software you use. [“If you click here, you confirm you have read these terms and agree with them.”].
The reality is we must make a judgment call about the benefits of the contract compared with the probability of an adverse event when dealing with contracts, but especially contracts of adhesion.
Business Law Southwest. Business law that makes business sense.
