contracts & mistakes

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CONTRACT DRAFTING - BOTH AN ART AND A SCIENCE “Only the Paranoid Survive” Andrew S. Grove ~ Intel Prima FACIE / Law Firm ® Corporate Legal Counseling All Rights Reserved © 2009 Contracts & Mistakes

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Avoid 100 top contract mistakes

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Page 1: Contracts & Mistakes

CONTRACT DRAFTING - BOTH AN ART AND A SCIENCE

“Only the Paranoid Survive” Andrew S. Grove ~ Intel

Prima FACIE / Law Firm ®Corporate Legal Counseling

All Rights Reserved © 2009

Contracts & Mistakes

Page 2: Contracts & Mistakes

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TOP MISTAKES IN CONTRACTS

Prima FACIE / Law Firm ® Corporate Legal Counseling 

"My God, it's Full of Stars!“ Monolith, Arthur C. Clarke, 2001 Space Odyssey ©

“IF STARS REPRESENT MANDATORY RULES OF CIVIL

LAW, THEN THE DARK SPACE OF THE UNIVERSE IS THERE FOR

CONTRACTUAL FREEDOM. USE IT WISELY.”

Page 3: Contracts & Mistakes

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TOP MISTAKES IN CONTRACTS

Prima FACIE / Law Firm ® Corporate Legal Counseling 

- General Agreement- SoW

Page 4: Contracts & Mistakes

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TOP MISTAKES IN CONTRACTS

Prima FACIE / Law Firm ® Corporate Legal Counseling 

Mistake No. 1 There Is No Contract

Page 5: Contracts & Mistakes

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Thinking There Will Be

No Problems

Weather delays, employees are quitting, computers break down,

software is full of bugs, governments and unions have new bright

ideas that ruin the business, and more and more will happen. It

always does

Prima FACIE / Law Firm ® Corporate Legal Counseling 

TOP MISTAKES IN CONTRACTS

Page 6: Contracts & Mistakes

6

Not Investigating and Understanding Future

Business Partners

Prima FACIE / Law Firm ® Corporate Legal Counseling 

TOP MISTAKES IN CONTRACTS

Perhaps the most fundamental mistake made by businesses is failing to adequately investigate the entities with whom a business intends to enter a

contractual relationship. While most companies analyze whether a proposed deal is financially advantageous, a surprising number fail to

adequately study their proposed business partners. It is important because it provides warning signs about the partner, the likelihood that obligations

will be met and whether litigation is likely if disputes arise.

Page 7: Contracts & Mistakes

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Failing to accurately

identify the parties to the contract

Prima FACIE / Law Firm ® Corporate Legal Counseling 

TOP MISTAKES IN CONTRACTS

The contract should identify the parties as completely as possible. In the case of corporations or other business entities, it is important to verify the capacity of the contracting party to bind the

corporation to the contract

Page 8: Contracts & Mistakes

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Hasty, Inadequate or Non-Existent

Due Diligence

Prima FACIE / Law Firm ® Corporate Legal Counseling 

TOP MISTAKES IN CONTRACTS

The next step should be to conduct thorough due diligence. Often businesses are so eager to "do the deal" that they

perform inadequate due diligence, or not at all. While companies elect to take "calculated risks," there are real risks

to circumventing due diligence. If a deal appears to be too good to be true, the need for due diligence is even greater.

Page 9: Contracts & Mistakes

9

Not Writing the First Draft

Negotiations start from the first draft. BE THERE. It might seem wise to let the other party write the

first draft – as a courtesy – but this will work against you in the end. Prima FACIE / Law Firm ® Corporate Legal Counseling 

TOP MISTAKES IN CONTRACTS

Page 10: Contracts & Mistakes

10

Ambiguous (Payment) Terms

Trust should never come into play when talking about business contracts. Make sure that the contract

explicitly states the exact payment terms with no room left for ambiguity

Prima FACIE / Law Firm ® Corporate Legal Counseling 

TOP MISTAKES IN CONTRACTS

Page 11: Contracts & Mistakes

11

OPPORTUNITY DEVELOPMENT AND MARKET RESEARCH TELEMARKETING

STATEMENT OF WORKOracle Czech s.r.o. - Linea Directa d.o.o.

 

  Nondisclosure & Security

Upon completion of the services, Provider will destroy the list, related materials

and all copies thereof (hard copy, electronic or otherwise) in its possession in a

manner that ensures that these materials cannot be recreated or used

by commonly encountered, usual commercial software.

 

Prima FACIE / Law Firm ® Corporate Legal Counseling 

TOP MISTAKES IN CONTRACTS

Page 12: Contracts & Mistakes

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Agreeing to Overly

Restrictive Covenants

Too restrictive covenants should be avoided if at all possible. If they are

unavoidable, they should be reasonable in terms of time and they SHOULD BE

MUTUAL. Such clauses either should not extend beyond the termination of the

contract or should not apply if the contract is terminated for cause

Prima FACIE / Law Firm ® Corporate Legal Counseling 

TOP MISTAKES IN CONTRACTS

Page 13: Contracts & Mistakes

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Overly Restrictive Covenants

INTELLECTUAL PROPERTY RIGHTS

LINEA DIRECTA (LD) represents and warrants that the Marketing Services, and

all parts thereof, provided under this Agreement do not infringe any patent,

copyright, trademark, trade secret or other proprietary right of any person or

entity (“Proprietary Interest”). LD agrees to defend, at its own expense, any claim

or suit against “CLIENT” and to pay all awards and damages of the foregoing

arising out of such suits or claims, in respect of any infringement, misuse or

misappropriation of any Proprietary Interest arising out of or related to this

Agreement of any Marketing Service provided hereunder, provided “CLIENT”

notifies LD of any such claim or suit. “CLIENT” shall be represented by its

own counsel at LD’s expense.

Prima FACIE / Law Firm ® Corporate Legal Counseling 

TOP MISTAKES IN CONTRACTS

Page 14: Contracts & Mistakes

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Overly Restrictive Covenants INTELLECTUAL PROPERTY RIGHTS

If any Marketing Service or part of it thereof is reasonably claimed to

constitute an infringement of the IP or other rights of third parties, or if

“CLIENT“ became the subject of a claim of infringement, LD shall, at its own

discretion either:

 

(a). Procure for “CLIENT” the right to continue usage; or

(b). Replace or modify the Marketing Service so that it becomes non-

infringing while continuing to meet specifications.

 

The previous section states LD 's entire liability and “CLIENT's” remedy for

infringement. In the event, that either of above solutions is reasonably

adequate, each party may declare that a Force Majeure Event has occurred.Prima FACIE / Law Firm ® Corporate Legal Counseling 

TOP MISTAKES IN CONTRACTS

Page 15: Contracts & Mistakes

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Committing to Long-Term

Contracts

Contract terms should be limited to one or two years and the parties should retain the right to terminate the contract if the

other party fails to perform or if one reasonably determines that continuation of the contract is no longer in his best interest

Prima FACIE / Law Firm ® Corporate Legal Counseling 

TOP MISTAKES IN CONTRACTS

Page 16: Contracts & Mistakes

16

Time is of the

EssenceIn business it is usually so, but it is not all about Time Value

of Money. The »Time is of the Essence« clause in transactions means that if time limits are not strictly

complied with, you can lose legal rights or have rights of the other party exercised against you.

  Prima FACIE / Law Firm ® Corporate Legal Counseling 

TOP MISTAKES IN CONTRACTS

Page 17: Contracts & Mistakes

17

Not knowing what you want

If you don't know what you want, you might not like what you get. Also, if you change your mind and change the goals, the contract and price will change.

(Hint: it won't get cheaper) Know clearly what you want.

 

Prima FACIE / Law Firm ® Corporate Legal Counseling 

TOP MISTAKES IN CONTRACTS

Page 18: Contracts & Mistakes

18

Entering a Contract Not Written or

Approved by a Lawyer

The temptation is greater when contracts "seem" simple. However, the rule that "THINGS ARE RARELY AS SIMPLE AS THEY SEEM" applies here. Having a lawyer to briefly review a contract is an investment that more than pays for itself and, if nothing else, allows a company to identify the risks

of proceeding without greater attorney involvement. Where companies enter the same type of transaction over and over again, the use of form-template contracts is appropriate as long as they are drafted or approved by a lawyer and the form is occasionally reviewed in light of new laws and

past performance.

If you don't know what you want, you might not like what you get. Also, if you change your mind and change the goals, the contract - and price - will change. (Hint: it won't get cheaper)

Know clearly what you want. 

Prima FACIE / Law Firm ® Corporate Legal Counseling 

TOP MISTAKES IN CONTRACTS

Page 19: Contracts & Mistakes

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No Provisions Relating to Defaults,

Opportunities to Cure and Termination

Companies are sometimes reluctant to raise these issues, because they worry that their partners will have second thoughts. However, these provisions are important ways to PROMOTE

PERFORMANCE and AVOID LITIGATION. If notice of breaches and opportunities to cure are required, parties that might otherwise litigate are forced to attempt to work out their

differences. Another important benefit of these provisions is that they require alleged contractual breaches to be raised when they first arise and not after problems spread and damages

escalate.

If you don't know what you want, you might not like what you get. Also, if you change your mind and change the goals, the contract - and price - will change. (Hint: it won't get cheaper)

Know clearly what you want. 

Prima FACIE / Law Firm ® Corporate Legal Counseling 

TOP MISTAKES IN CONTRACTS

Page 20: Contracts & Mistakes

20

Failing to be All-Inclusive

You should dot every i and cross every t. Not only should the legal terms be covered, but

also the specific requirements of both parties. Leave no stone unturned, and your interests will

always be protected.Prima FACIE / Law Firm ® Corporate Legal Counseling 

TOP MISTAKES IN CONTRACTS

Page 21: Contracts & Mistakes

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Assumptions

Assumptions are particularly harmful in contracts. If you are purchasing equipment, do not assume that the other

party will deliver the equipment with all related software or attachments. Spell it out explicitly.

Don't assume the other party will know that if you receive the goods late, you will lose big money.

Put a “Time is of the Essence“ clause in your agreement

Prima FACIE / Law Firm ® Corporate Legal Counseling 

TOP MISTAKES IN CONTRACTS

Page 22: Contracts & Mistakes

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Failing to Negotiate

Everything is negotiable. EVERYTHING. Even the things the other party tells you are not negotiable

are negotiable. Even preprinted forms are negotiable. It means that you discuss, argue, deliberate, and ultimately

agree upon all terms of the agreement. Not only are you ALLOWED to do this, you SHOULD. Too many

people fail to negotiate unfavorable terms in contracts.

Prima FACIE / Law Firm ® Corporate Legal Counseling 

TOP MISTAKES IN CONTRACTS

Page 23: Contracts & Mistakes

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Failing to Understand

If you do not understand a provision, find out what it means. Demand explanations, seek for answers.

AND DO IT BEFORE SIGNING

Prima FACIE / Law Firm ® Corporate Legal Counseling 

TOP MISTAKES IN CONTRACTS

Page 24: Contracts & Mistakes

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Lack of Deadlines And Penalties

When contracting for services it is critical that you include

timelines for completion of the work. It's one thing to say "Work to be

completed by May 2nd," but better to add, “EUR 300 per day to be

deducted from the contract price for each day the job is unfinished

beyond May 2nd." That's what I call a motivational clause.

Prima FACIE / Law Firm ® Corporate Legal Counseling 

TOP MISTAKES IN CONTRACTS

Page 25: Contracts & Mistakes

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Not Including All Deal Terms

In The Agreement

Include items upon which you relied when entering into the agreement. What is your reason for entering into the agreement ? Did the party state that he has

been in business a long time or has a particular type of expertise in a particular field? What did the other person agree that he would do for you and

what did you agree to do in return?

Prima FACIE / Law Firm ® Corporate Legal Counseling 

TOP MISTAKES IN CONTRACTS

Page 26: Contracts & Mistakes

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Leaving the Negotiation

Process Strictly to Lawyers

Lawyers will eliminate onerous clauses, but are often not aware of industry standards. Have the contract reviewed by both a legal professional and an industry professional. Having a legal professional draft or

review a contract is necessary, but not always sufficient to ensure a solid contract.

Prima FACIE / Law Firm ® Corporate Legal Counseling 

TOP MISTAKES IN CONTRACTS

Page 27: Contracts & Mistakes

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Failing to Adequately Define How or When

The Contract Terminates

A contract should specify the length of time of the contract – either terminating on a stated expiration

date or on completion of performance. Litigation may be avoided if the parties are clear about the

grounds for termination

Prima FACIE / Law Firm ® Corporate Legal Counseling 

TOP MISTAKES IN CONTRACTS

Page 28: Contracts & Mistakes

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Contract Language/s &

Translations

If the contract exists in several language versions, only one version of the contract, is a binding contract. All other language versions are translations for

conveniance only and have no legal binding power

Prima FACIE / Law Firm ® Corporate Legal Counseling 

TOP MISTAKES IN CONTRACTS

Page 29: Contracts & Mistakes

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Leaving Out Boilerplate Provisions

These are clauses that protect the rights and privileges of the parties, like Notice Provisions, Assignment, Integration, Consent to jurisdiction and Forum selection, Modification of

Agreements…Prima FACIE / Law Firm ® Corporate Legal Counseling 

TOP MISTAKES IN CONTRACTS

Page 30: Contracts & Mistakes

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No Paraph on all Pages

before Signing

Puting a paraph on each numbered page of the contract, declares that negotiations are concluded but also prevents the integrity of the substance of the contract untill the signing - closing

un

Prima FACIE / Law Firm ® Corporate Legal Counseling 

TOP MISTAKES IN CONTRACTS

Page 31: Contracts & Mistakes

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Not Signing the Contract as the

Last Party

It is the best solution if the contract is signed simoultaneously by both or all of the parties. If this is not the case,

never be the first party to sign, be the last, so nothing can be changed or amended in the contract with your signature already on.

un

Prima FACIE / Law Firm ® Corporate Legal Counseling 

TOP MISTAKES IN CONTRACTS

Page 32: Contracts & Mistakes

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Using Generic, One-Size-Fits-All

Contracts

Popular in Sales, but dangerous if not used properly. The fact is, there are no One-Size-Fits-All business situations in real life. Use with caution.

Have them checked by the lawyer anyway.  

un

Prima FACIE / Law Firm ® Corporate Legal Counseling 

TOP MISTAKES IN CONTRACTS

Page 33: Contracts & Mistakes

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Rushing Through the Agreement

to Closing

Businesses are often in a hurry to get deals done. But, it is never a good idea to negotiate and execute an agreement hastily.

The results could be unfavorable terms, ambiguance language or even an unenforceable contract

  

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Prima FACIE / Law Firm ® Corporate Legal Counseling 

TOP MISTAKES IN CONTRACTS

Page 34: Contracts & Mistakes

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No Third-Party Escrow Servicing

(Escrow Account)

Using an escrow account or agent is well worth the small cost. All deposits and down payments should be deposited on escrow account and not to the other

party, whenever possible

Prima FACIE / Law Firm ® Corporate Legal Counseling 

TOP MISTAKES IN CONTRACTS

Page 35: Contracts & Mistakes

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Failing to Define Rights and Obligations

That Are Assignable

f

You should include an assignment clause, so you can transfer the rights to third parties without seeking consent of the other party.

(Contract, not claims in commercial contracts)

   

unPrima FACIE / Law Firm ® Corporate Legal Counseling 

TOP MISTAKES IN CONTRACTS

Page 36: Contracts & Mistakes

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Failing to Include a “No Set-Off"

Clause If

Without a “No Set-Off” clause, you open the back door for the other party to acquire your outstanding debt (with discount) and set it off

against your claims. You’ll never see any money, no Cash Flow, just Paper Flow…

  

un

Prima FACIE / Law Firm ® Corporate Legal Counseling 

TOP MISTAKES IN CONTRACTS

Page 37: Contracts & Mistakes

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Failing to adequately state the method

for resolving disputes

Arbitration clause is often drafted too narrowly; thereby, excluding certain types of disputes from arbitration. Other essential elements include the location of arbitration, the governing law…

  

un

Prima FACIE / Law Firm ® Corporate Legal Counseling 

TOP MISTAKES IN CONTRACTS

Page 38: Contracts & Mistakes

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Failing to Include a Choice

of Law Clause If

Conflicts of law issues arise when the parties are residents of different jurisdictions, or obligations are to be performed in more than one. It can be resolved in advance with the proper choice of law provision. Without this clause, the law of the place where the contract was made, or services were

performed will apply.

 

  

un

Prima FACIE / Law Firm ® Corporate Legal Counseling 

TOP MISTAKES IN CONTRACTS

Page 39: Contracts & Mistakes

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Failing to include a Contract

Effective Date If

It is important that the contract states when the contract is effective, for purposes of determining obligations and the time for performance

   

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Prima FACIE / Law Firm ® Corporate Legal Counseling 

TOP MISTAKES IN CONTRACTS

Page 40: Contracts & Mistakes

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Failing to determine What Happens

After Termination?If

The contract must spell out obligations of both parties, during and AFTER the life of the contract. Some provisions SURVIVE TERMINATION (Reps & Warranties, Non Disclosure…)

  

un

Prima FACIE / Law Firm ® Corporate Legal Counseling 

TOP MISTAKES IN CONTRACTS

Page 41: Contracts & Mistakes

41

Have You Ever Actually Read

Your Entire Contract?

The contract is the key to your obligations and responsibilities. How many contractors actually read the entire contract before beginning performance? Most read the Statement of

Work (SOW) and proceede, but there are other critical sections in the General Agreement that are equally or more important

. If

   

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Prima FACIE / Law Firm ® Corporate Legal Counseling 

TOP MISTAKES IN CONTRACTS

Page 42: Contracts & Mistakes

42

Follow the Contract not verbal

Promises andDirections

Only the written word is binding. Contractors should learn to ignore diplomatically any verbal advice from any business partner or government official - no matter how convincing.

The written contract always defines your duties and responsibilities. Reliance upon verbal advice is at your own risk.

. If

  

unPrima FACIE / Law Firm ® Corporate Legal Counseling 

TOP MISTAKES IN CONTRACTS

Page 43: Contracts & Mistakes

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EstablishingInternal Procedures and

Protocols to Insure Contractual Compliance

and Avoid DisputesIf

The final and often most serious mistake that businesses make is that they merely file a contract in a cabinet and then proceed to "do business.“ Companies too often ignore the

contract and only consult it when problems arise. By failing to establish procedures to monitor performance, companies may breach their contracts or may waive the right to insist

that their business partners fulfill their obligations.

   

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Prima FACIE / Law Firm ® Corporate Legal Counseling 

TOP MISTAKES IN CONTRACTS

Page 44: Contracts & Mistakes

44

Protocols to Insure Monitoring of

Executed ContractsIf

Executed contracts should be forwarded to the managers and employees responsible for performance. Individuals should be assigned to insure that business partners fulfill their responsibilities. These people should understand the agreement . If personnel changes occur, companies must have procedures to insure that the new

managers or employees are educated about the contract. Companies should verify that its managers and employees are fulfilling the requirements of the contract and regularly

CHECK TO INSURE THAT PROTOCOLS ARE FOLLOWED.

   

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Prima FACIE / Law Firm ® Corporate Legal Counseling 

TOP MISTAKES IN CONTRACTS

Page 45: Contracts & Mistakes

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Tips & WarningsIf

TAKE YOUR TIME to read the contract. If you don't understand it, ASK A LAWYER to look it over.

Always KEEP A COPY of the contract.DO NOT SIGN anything that is BLANK. Make sure everything is filled out before signing your signature.

Read the DEFINITIONS and check ATTACHMENTS

   

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Prima FACIE / Law Firm ® Corporate Legal Counseling 

TOP MISTAKES IN CONTRACTS