Entering into a new contract is an exciting time for any company.  The agreement is signed with the hope that it will grow the business and result in a long and beneficial relationship between the parties.

While optimism is warranted, the importance of entering into a legally sound contract is critical to the protection of the business.

Principal terms, such as price, delivery of the particular good or service, and methods of payment, are essential and typically resolved during the initial negotiation stage.   However, there are also difficult issues that need to be negotiated into the agreement should the relationship not develop as expected.

Negotiating the “what ifs” or pitfalls if the contract goes bad are best addressed at the outset when the parties are eager to reach an agreement and goodwill is at its highest.  It is at this time that the company should strive to sign an agreement that (1) extracts the greatest amount of benefit and (2) avoids and mitigates potential risks.

There are several contractual provisions and concepts that can be used to reduce a company’s risk and protect your business.  The following are some examples:

  • Representations and Warranties:  Limit the scope of any representation or warranty concerning the performance of services and/or the goods being sold.  Businesses should also seek to exclude warranties that can be implied by law.
  • Indemnification:  Indemnification is a method of risk allocation and shifts liability from one party onto another.  All liability should be excluded when the other party is at fault and responsible for causing a loss.  Indemnification can come in many forms, but at its core, it is a method to shift risk onto the other side.
  • Limitation of Liability:  This provision can limit the types of claims that can be recovered under a contract.  It can also be used to cap a party’s liability to a fixed dollar amount.
  • Automatic Renewal:  Automatic renewals, or evergreen clauses, can allow a contract to be automatically renewed for a certain period of time unless a party cancels the contract before the automatic renewal date.  Evergreen clauses are enforceable in the most states, including Pennsylvania.  Be sure to calendar the cancellation date contained within a contract in order to avoid having a contract renewed unexpectedly.
  • Termination Provisions: The termination clause should guide the parties on how to legally exit the contract.  Proactive and creative thought should be given on the types of potential disputes that may arise under the agreement.  Dealing with termination issues from the outset can you’re your business avoid headaches down the road.
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