How the devil is in the details — in contracts

Buried within the standard terms and conditions of most contracts are pitfalls which, if not carefully reviewed, will trap the unwary. When contracting, parties spend most of their efforts negotiating price. As they reach agreement, the vendor pulls out its standard contract, the buyer confirms the price, and both parties sign. Only months later does the business learn the fine print in the contract converts the contract from something to be celebrated into a profit-eating lawsuit.

Skyrocketing litigation costs make lawsuits an inefficient means of resolving disputes — especially contract disputes, given the parties had a chance to address the issue during contracting. Businesses that have poured money into contract disputes quickly learn that “an ounce of prevention is better than a pound of cure.” No contract should be signed until it is fully understood and clearly delineates the obligations of the parties. In reviewing contracts, five provisions require close scrutiny.

  1. The Termination Provision. The contract should provide whether it can be terminated with or without cause and the financial ramifications of the termination. The cost of termination should be based on the reason for termination.

    For example, there is a licensing company that touts that its contracts can be terminated “without cause” at any time. While true, the fine print provides the licensee must pay the full contract price whether the contract is terminated with or without cause. Not only is the sales pitch misleading, but the distinction between with/without cause is meaningless since, either way, the buyer owes the full contract price.

    Before signing any contract, the business must understand what happens if it must terminate the contract.

  2. The Integration Provision. Contracts are filled with non-controversial, “boilerplate” provisions that are inserted with little thought by the drafter. One such provision is the “integration clause,” which provides that all agreement terms are included in the written document. The clause is important because, during the sales pitch, the vendor inevitably made promises about its performance that were critical factors in selecting the vendor.

    However, the integration clause makes these oral promises difficult, if not impossible, to enforce unless they are spelled out in the agreement.

  3. The Indemnification Provision. Another ubiquitous provision is an indemnification provision. Indemnification requires one party to “indemnify” and “hold harmless”, i.e., pay, all costs incurred by the other party (the indemnitee).

    The problem with indemnification is it frequently requires indemnification for the misconduct of the indemnitee and is not limited to the contract price. For example, an indemnification provision in a $10,000 subcontractor agreement might require the subcontractor to spend ten times the contract price indemnifying the general contract for the misdeeds of the general contractor.

    Contracts should never be signed until the business understands its potential exposure under the indemnification provision and what triggers the obligation.

  4. Limitation of Liability. The limitation of liability provision is the inverse of the indemnification provision and, as the name implies, limits the liability of a party. Typically, the provision benefits only the vendor and limits the vendor’s liability to the contract price — often a wholly insufficient amount.
  5. Attorney’s Fee Provisions Incentivize Parties. Parties to a lawsuit must pay their own legal fees unless, among other exceptions, the contract provides for the recovery of attorney’s fees. Not all attorney fee provisions are created equal and some of them, especially one-sided provisions, can create a perverse incentive for a party to litigate non-meritorious claims.

    Before signing any contract with an attorney fee provision, the business must understand how the provision will incentivize the parties if a dispute arises.

Businesses enter into contracts every day. Regardless of whether the contract is a formal 60-page document or a two-page agreement written on the back of a napkin, the business must fully understand all of the terms and how every provision will impact the company, especially in the event of a breach.

Christopher J. Marino is a shareholder at the Boston law firm Davis, Malm & D’Agostine P.C., of Boston, practicing in the Litigation, Business Law, Employment, and Real Estate and Environmental areas. He has extensive experience in the trial and appeal of complex business litigation in the areas of shareholder disputes, corporate governance, securities, real estate, construction and development, employment relations, contracts, and insurance coverage disputes. He can be reached at [email protected].

Martha Stewart loses bid to dismiss Macy’s contract claim

NEW YORK, Fri Apr 12, 2013 — Martha Stewart’s company lost a bid on Thursday to dismiss Macy’s Inc.’s claim that it violated their contract when it designed certain products for J.C. Penney Co. Inc., even if the products do not carry the Martha Stewart brand.

New York State Supreme Court Justice Jeffrey Oing’s ruling may affect whether J.C. Penney can sell Martha Stewart-designed home goods in bedding, bath and cookware under a “JCP Everyday” label.

The judge is expected to rule Friday on whether to temporarily block Penney from selling Martha Stewart-designed goods that Penney manufactured in that “Everyday” packaging.

A preliminary injunction already in place bars J.C. Penney from selling Martha Stewart brand products in certain categories.

A Citi analyst on Tuesday estimated the inventory already in a warehouse could be worth $100 million.

Oing also pushed again for the sides to settle, rather than leaving the matter in his hands.

“This is a business deal that you should not have courts getting involved in,” Oing said. “It’s getting to a point where the clock can’t be turned back. The ship is ready to sail.”

Macy’s sued J.C. Penney and Martha Stewart Living Omnimedia Inc. (MSO.N) after the two companies announced plans in December 2011 to open “Martha Stewart” stores within J.C. Penney.

 

The plans were part of Ron Johnson’s attempt to re-invent J.C. Penney after he became chief executive in November 2011. Johnson, who came under fire after sales fell 25 percent at the department store last year, was ousted on Monday.

Chrysler, UAW reach tentative four-year labor contract

DETROIT ― The United Auto Workers and Chrysler Group LLC reached tentative agreement on a four-year labor contract for the No. 3 U.S. automaker’s 26,000 hourly production workers, the union said on Wednesday.

This is the first labor pact for Chrysler since its 2009 bankruptcy and federally funded bailout.

The agreement follows deals between the UAW and Chrysler’s Detroit rivals, General Motors Co and Ford Motor Co.

The GM contract was ratified by workers late last month, and Ford workers are in the process of voting on their pact. While the GM contract was ratified by a nearly 2-to-1 margin, early returns from Ford local union halls show essentially a 50-50 split. The voting at Ford continues through Oct. 18.

In a press statement, UAW President Bob King said the Chrysler contract will create 2,100 U.S. jobs and commit the company to a $4.5 billion investment in vehicle production.

Further details will be issued later Wednesday by the UAW.

Chrysler is managed and majority-owned by Italy’s Fiat SpA. Fiat shares were up 5 percent to an eight-week high following news of the Chrysler agreement.

Labor analysts do not expect the contract to be as generous for workers as the deals at GM and Ford, due to Chrysler’s relatively poor financial position.

Fiat took the reins at Chrysler after the company’s 2009 restructuring. Chrysler has since reversed a slide in U.S. auto sales and repaid U.S. government loans. However, it remains in much weaker financial position than GM or Ford.

The 2009 U.S. rescue saddled Chrysler with an outsized debt load, in contrast to GM, which emerged from bankruptcy with little debt. Chrysler refinanced $7.6 billion of that debt on its balance sheet in May.

Sergio Marchionne, chief executive of both Fiat and Chrysler, has said Chrysler should not have to accept as expensive a contract as Ford and GM.

“Some of the deals that we’ve seen being signed between Ford and GM (with the UAW) are probably, given Chrysler’s own predicament … overly generous,” Marchionne said last Friday.

The UAW’s talks with Chrysler began in late July but stalled last month as the company pushed for more union concessions than its Detroit rivals got.

Ford was the only one of the three Detroit automakers to avoid bankruptcy and restructuring in 2009.

Ford’s tentative deal with the UAW calls for each veteran hourly worker to get at least $16,000 in bonuses. The GM deal is slightly less generous, but Ford may benefit as lower-paid new workers fill new positions or replace veteran employees.

UAW expects GM contract deal after ‘much progress’

DETROIT ― The United Auto Workers union has made “much progress” toward reaching a new contract with General Motors Co. to replace a deal on wages and benefits that expires just before midnight on Wednesday, a senior union official said.

“We are confident that we can reach an agreement that will meet many of the goals we set at the beginning of negotiations,” UAW Vice President Joe Ashton said in an electronic update on negotiations for the 49,000 union-represented workers at the top U.S. automaker.

The comments from Ashton represented the most upbeat assessment from the union since negotiations entered a more intensive phase over the past week.

Ashton said the union’s goal was to reach a tentative contract deal with GM, rather than face arbitration.

The union was barred from calling a strike at GM under the terms of the automaker’s restructuring in its 2009 bankruptcy funded by the Obama administration.

“Our negotiations with management have reached a critical stage as we near the expiration of the national agreement,” Ashton said.

A day earlier, Ford Motor Co and the UAW agreed to extend their contract to allow for the union to reach an initial deal with GM or Chrysler Group LLC.

Negotiations in Detroit between GM and Ashton’s UAW negotiating team broke off around 11 p.m. on Tuesday night, a person familiar with the talks said.

Talks continued at Chrysler late the night on Tuesday. The union’s Chrysler negotiating team said it was working “tirelessly” to reach a deal in an update on its Facebook page.

In these talks, which will set wages and benefits for about 113,000 workers for the next four years, the companies are focused on keeping labor costs down. The UAW is angling for more auto production jobs in the United States as well as one-time bonuses because of the industry’s improved profitability.

The negotiations are being watched by investors as an indication of how much Detroit has changed since the steep downturn and sharply tighter financing that almost forced GM and Chrysler out of business in late 2008 and threatened Ford.

GM Chief Executive Dan Akerson and Vice Chairman Steve Girsky have been involved in the GM talks over the past week, people with knowledge of the proceedings have said.

Chrysler Chief Executive Sergio Marchionne left the Frankfurt auto show on Tuesday night to return to Detroit, a source said.

If the deadline is not met, the union and the company teams would have to agree to extend the current contracts, which is seen as a routine matter, analysts have said.

GM has about 49,000 UAW-represented workers, Ford has about 41,000, and Chrysler, controlled by Italy’s Fiat SpA, has about 23,150.

How to improve the value of your contracts by remaining vigilant

John Benko, member, McDonald Hopkins PLC

During the past few years, construction and manufacturing industry survivors have become experts at controlling costs and reducing nonessential assets, and are cautious about expanding operations.
They have also carefully managed their contractual dealings in an effort to preserve customer relationships. In order to maintain these relationships, companies have largely relied on cost cutting to protect profitability rather than raising revenue, says John E. Benko, a member with McDonald Hopkins PLC.
“While all of these efforts were required to survive during the past few years, they have had negative effects,” says Benko. “During the recession, companies quoted and budgeted aggressively to win work necessary to provide essential cash flow. As the economy recovers, these contracts are becoming a burden. Cost cutting and downsizing have left administrative personnel overburdened and, in some cases, unable to properly administer new and existing contracts profitably.”
Smart Business spoke with Benko about how to improve contract value.

What legal rights do companies have to help maximize the value of existing contracts?

All contractual relationships are controlled by the terms of the contract, and each party must understand what the contract includes. Knowing the terms will permit a company to know when a request for a price increase or decrease may be appropriate or allowed.
For example, in construction projects, the contract includes the plans and specifications that accompany the contract itself. If an owner asks a contractor to perform work citing boilerplate language from terms and conditions, the contractor should make certain that the work is included within the project scope.
Companies may have previously simply performed such work without additional compensation. However, when dealing with a contract that was bid aggressively during difficult economic times, it must seek compensation for every potential change.
Likewise, manufacturing purchase orders should be reviewed to determine the scope of the agreement. A careful analysis of the terms and the contracting process is necessary and prudent to determine the real terms of the parties’ relationship, as suppliers may have significant rights of which they were not aware. Requested changes in quantity, design or delivery of product may also open the door for renegotiation.
Course of performance between the parties will also be relevant to a manufacturer’s rights. Customers will argue that if a supplier has performed for years without complaint, this defines the terms of the parties’ relationship. However, course of performance flows both ways. Under certain circumstances, limited resourcing by a customer of some parts may open the door for the supplier to terminate its remaining obligations despite contractual language to the contrary.
Contractors and suppliers should also keep in mind that sometimes the best way to maximize the value of a particular contract is to strategically end the relationship, or threaten to do so, if there is no hope of profitability.