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 which 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 which
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 state’s
laws may differ on these subjects, verify
that the state in which you are doing business allows such a waiver or 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 sides’ 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.
