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Does My Contract Protect Me?

December 27, 2018

 

 

Introduction

 

Properly drafting contracts can help avoid misunderstandings, ensure prompt payments and cover your losses if something “bad” occurs. Here a few tips to help you make sure those “form contracts” you downloaded for free are worth more than the virtual paper they were written on.

 

Disclaimer: The following information does NOT constitute legal advice and is only for general educational purposes.  Each situation is different and specific legal issues usually require additional research and investigation, so do not rely on this article to address a particular legal issue; use this as a starting point to gain a general understanding.

 

 

1.  Clarity, Consistency, Conciseness

 

Well written contracts should be clear, consistent and concise.

 

The joke about lawyers being paid by the word has a little more truth to it than we all want to admit. That said, contracts should be as long as the need to be, but not one word longer. Personally, I don’t favor old style versions that have paragraphs that run on for the entire page. I spent my life as a geek in the library and I still have trouble both reading and understanding chunky paragraphs that go on forever.

 

I believe that kind of run-on verbiage is sloppy draftsmanship and retrograde thinking. I like to break up complicated paragraphs into as many little neat sub-paragraphs as possible, so that the readers eye can clearly distinguish when a new important issue is being discussed. I also tend use examples in my contracts, especially when complex payment or penalty provisions are being discussed, or convoluted delivery schedules.

 

Terms should be as clear as possible, and the minimum you will need is identifying (1) the parties (2) the time of the contract (3) the substance of the contract, i.e. what’s being traded (4) the duration of the contract. Anything missing this is likely to fail or have the possibility of being interpreted in some other way than the parties intended.

 

Finally, be consistent. This isn’t the time to write Shakespeare or create something interesting. If you refer to the traded item as “widgets,” then make sure you always call it “widgets,” and not “nuts and bolts” later on in the same document. Same thing with parties, and all other terms. Keep it the same or you risk confusion, with legal consequences.

 

2.  Indemnification vs. Lawyers Fees

 

A lot of times you will “Indemnification” clauses that say something like, “in the event everything goes bad, Party A will indemnify Party B and cover all of Party A’s lawyer’s fees.”

 

Please keep in mind that if the clause simply says “indemnify” and doesn’t mention the lawyer’s fees, it’s possible such fees may NOT be covered. You could argue that lawyer’s fees *are* part of any indemnification, but usually indemnification refers to expenses the injured party has to pay to some other injured party.


For example, assume Retail Story Owner A is selling Manufacturer B product to Customer C and the product blows up in C’s face, and there is *only* an “indemnification” clause and not a “lawyer’s fee” part of the contract between A & B. This is what will happen: C will sue Retail Store Owner A for selling a dangerous product. C also will sue Manufacturer B for making a dangerous product. Let’s say C wins a million dollars from A & B separately ($2M total). If B is indemnifying A, then B will pay $2M (one million for B and one million on behalf of A, since B is “indemnifying” A). However, Retailer A still might have paid $100,000 or more in legal fees defending itself. In this contract, B does NOT have to reimburse A for legal fees, so A is out $100,000 out of pocket. If the contract between A & B includes a “lawyer’s fee” provision, then B will have to cover A’s lawyers fees.

 

3.  What Does “Commercially Reasonable Mean”?

 

So let’s say A and B’s contract did include a coverage of lawyer’s fees. Usually the language will look something like “B will indemnify A and cover all commercially reasonable legal fees with respect to any cause of action resulting from B.”

 

You see the “commercially reasonable” in the agreement - what’s that about? Suppose Retail Store A hires the best law firm in the world, Duey Cheatum & Howe (“do we cheat ‘em and how!” - not my joke, it’s a traditional lawyer goof). DC&H charges $2,000/hour when the normal fee might be closer to $500 - $1,000/hour (yes that’s what real law firms charge larger clients).

 

It means if DC&H is much higher than what is considered to be the “commercial norm” B might only have to cover A’s legal expenses to a “reasonable” amount, such as $500-$1,000 hour. That means A will still be out of a lot of money for legal expenses. However A, still will receive a decent amount back. That’s not too bad. But just be aware, when one party covers another, it might not be for the full freight.

 

To be Continued

 

 

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