Companies are sometimes surprised
to learn that their contracts are on
occasion anything but enforceable.
Even the seemingly plain terms of negotiated contracts and form contracts have
loopholes. If your business depends on
certainty, and you want to avoid “he said,
she said” disputes, carefully drafting and
reviewing contracts before signing can
help avoid problems down the road.
Smart Business spoke with Clay Steely,
a litigation partner with Porter & Hedges
LLP, to learn more about arguments used
to avoid the plain terms of contracts and
to assess how companies can protect
themselves from such arguments.
What are some common arguments used to
defeat contracts?
In what I call ‘private’ contracts, parties
normally negotiate to memorialize a specific deal to avoid factual disputes over
the parties’ obligations in the future. Two
common arguments used to defeat private contracts are 1) the deal is not as
expressed in the contract, or 2) a party
misrepresented some fact that improperly induced the other party to enter into
the contract.
To try to address/avoid these arguments, many contracts expressly state:
‘This contract contains all the agreements
between the parties and no representations outside the contract are enforceable’ (a merger/integration clause).
Seems straightforward, right? Not
always. Claims that a party misrepresented the deal or improperly induced a party
to enter into a contract (fraud) are commonly used to try to defeat contracts.
Even when a contract contains an
express merger clause like the one noted
above, the inquiry does not end. Courts
many times will analyze how the clause is
worded and who was involved in the
transaction when the clause was put in
place. If a court finds that a contract is
unclear, the terms were not expressly
addressed in a contract or that a merger
clause is insufficient, a business may be
faced with having a jury decide the meaning of the contract. In short, the document you thought would help you avoid uncertainty and any future disputes does
not help at all. However, carefully crafted
written contracts can address and try to
eliminate some of this uncertainty as well
as potentially costly future problems.
What are some problems with form contracts?
Purchase orders and invoices contain
terms. Everyone has seen them. Very few
people read them. Many times each
party’s documents have different or new
terms. The problem then becomes which
documents’ terms control? Such a dispute is sometimes referred to as a ‘Battle
of the Forms.’ For example, if your purchase order does not limit the transaction to your terms, if you accept an
invoice that states you agree to waive
certain rights or bring your dispute in a
different state, those terms may be
enforceable.
How can I avoid some of these problems?
Careful drafting and review of all contracts can help. For private contracts,
use well-drafted language — like merger/integration clauses — to try to avoid future problems. Carefully consider the
use of clauses requiring a party to pay for
problems caused by the other party’s
actions (indemnity). Be as specific as
you can on the duties and obligations of
the parties. For form contracts, talk to
your employees. Tell them to read what
they sign, even the small print on the
back of a document. If there is any question that the contract is changing/waiving a company’ rights or contractual
terms, then they need to discuss that
issue before signing the contract.
Draft your forms so another party’s
documents can not change your terms.
But be sure that your terms meet the
requirements of the jurisdictions in
which you are doing business. For example, some terms waive a trial by jury or
stipulate what law applies or where any
lawsuit must be filed if a dispute arises.
Since individual states’ laws may differ
on these subjects, verify that the state in
which you are doing business allows
such a waiver of venue choice. Waiver of
a right to a jury, choice of law, choice of
venue (place a dispute will be litigated),
limitation of damages, liquidated damages (setting the amount of damages for
certain problems) and many other clauses can be very helpful.
As a litigator, I routinely see out-of-state companies forced to litigate contractual matters in Texas because they
did not have the correct language in a private contract or some representative
signed a form contract in Texas that had
terms and conditions forcing the company to litigate in Texas under the other
side’s terms.
Small contractual matters no one
thought were significant can end up
being expensive, not because the dispute
is large, but because the company is
forced to litigate in a place it did not
choose, under terms it did not want. Be
wary of these issues and, at the same
time, use knowledge of the issues to protect your business. A lawyer can help you
do both, and help businesses be sure that
the contract they bargained for remains
the contract that is enforced.
CLAY STEELY is a partner with Porter & Hedges LLP. Reach him at [email protected] or (713) 226-6669.
