Know what you sign Featured

8:00pm EDT October 26, 2007

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 csteely@porterhedges.com or (713) 226-6669.