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Contracts101Part3

Themostimportantandmostignoredcontractclauses

Inthepreviouspartsofthisarticlewediscussedthelegalelementsnecessaryforacontracttoexist.
Theparticularsofeachcontractwillvarydependingonthesubjectmatterofthecontractatissue.
However,whenwritingorreviewingacontract,ingeneralyouwanttobesureto1)addressallpossible
situations,and2)makesurethattherearenoambiguities.Toachievetheabove,youwanttodiscuss
thedetailsofperformance,termination,changeincircumstances,andenforcement.However,thispart
ofthearticleisnotintendedtoteachyouhowtodraftacontract,instead,itismeanttointroduceyou
tocommoncontractclauseswhichyouarelikelytorunintoregardlessofthesubjectmatterofthe
contract.Theseclauses,thoughconsideredboilerplate,playacriticalroleincontractsandcanhave
veryseriousconsequences,thus,itistoyouradvantagetounderstandthemandusethemas
appropriate.

Aboilerplatecontractclauseisonethatisfoundinalmostallcontracts.Unsophisticatedbusiness
peoplewilloftenrefertotheseasthefineprintandwilltendtotreattheseclausesasinsignificant
legalverbiage.However,thoughsometimestheseclauseshavenothingtodowiththesubstanceofa
particulardeal,theydogovernhowthecontractitselfworksandthewaythecontractworkscanbethe
differencebetweenaprofitableventureandadisaster.Thelistofboilerplatecontractclausesis
extensive,adiscussionofthemostsignificantofthesefollows.

IntegrationClause

Thisiscontractclausethatbasicallystatesthatthecontractistheentireunderstandingbetweenthe
partiesinvolvedandthatnothingelseistobeconsideredpartofthecontract.Simplyput,itstatesthat
thecontractisacompleteexpressionofalloftheintentionsoftheparties.Thoughthisclausesounds
simpleandinsignificant,itspresenceorabsencecanhaveasignificanteffectonanydeal.

Considerforexampleadiscussionbetweentwobusinessmenforthesaleoforanges.AlexsaystoBob,I
willbuy100casesofyourorangesata10%discountandifmycustomerslikeyourorangesthenIwill
buy100caseseachmonthfortwoyearsatthesamediscount.Bobsattorneydraftsacontractforthe
saleof100casesoforangesata10%discountbutbyneglectstoincludethepartaboutAlexsdesireto
buy100caseseachmonthfortwoyears.AfterayearofsellingorangestoAlex,Bobdecidestosellto
Caseyata5%discountinstead.

Youcanseehowinthissituationwhetheranintegrationclausewasincludedinthecontractbecomes
vitallyimportantforAlex.Iftheintegrationclausewasincluded,thenAlexisoutofluck,becausethe
contractwillbeconsideredcompleteandthefactthatthetwoyearcommitmentwasintendedwillnot
beallowedintoevidenceintheeventofalawsuit.However,iftheintegrationclausewasnotincluded
intheoriginalcontractthenAlexwillbeabletotellthecourtabouthisoriginaldiscussionwithBoband

abouttheirintentionforthisarrangementtolastfortwoyears.InthatinstanceAlexwillhaveachance
ofenforcingthecontractfortheremainderofitstermorrecoveringbreachofcontractdamages.

Thelessontotakeawayfromthisisthatifanintegrationclauseexistsinthecontract,makesurethat
thecontractaddressesallofthethingsyouhavediscussedduringthedeal.Unlessthesubjectofyour
discussionismentionedinthecontractitwillbebarredfromevidencebytheintegrationclause.

LimitationofLiability

Thenextmostignoredbutveryimportantboilerplateclauseisthelimitationsofliabilityclause.This
clauselimitsthedamagesrecoverableunderacontracttoacertainamount.Theamountcanbeset
prettymuchatrandom,however,dependingonthesubjectmatterofthecontract,courtsfrequently
imposearequirementthattheamountbereasonableotherwisetheclausewillbeheldtobe
unenforceable.Theimportanceofthisclausealmostneedsnoexplanation,however,itissurprisingto
seehowmanypeopleignorethisclauseandareshockedtodiscoveritsexistencewhenitisalreadytoo
late.

Saythatinthedealwediscussedabove,Bobincludedalimitationofliabilityclauseinhiscontractwhich
statesthattheliabilityofBobunderthecontractshallnotexceedtheamountpaidfortheorangesina
givenmonth,andthisliabilityamountincludesreasonableattorneysfees.Alexbeingatrustingfellow
ignoresthisandhappilysignsthecontract.SixmonthintothecontractAlexisdoingreallywelland
signsayearandahalfleaseforlargerspaceforhisstoreintendingtosellBobsorangesforthe
remainderoftheirtwoyearcontractterm.Asabove,oneyearintothedealBobstopssellingoranges
toAlexandstartssellingthemtoCasey.Nowallofasudden,notonlydidAlexloosehisorangesupplier
buthehasoneyearleftonaleaseforalargerstore,thusforonemoreyearhewillbepayingmorerent
thanhewaspayingbeforeandallbecauseofBob.LetsassumethatAlexwinsthelawsuitagainstBob
forbreachofcontractandwantstogettheexcessrentthathenowhastopayforthelargerspacefor
anotheryear.

Thisiswherethelimitationofliabilityclausekicksin.IntheexampleabovetheclauselimitsAlexs
recoveryunderthebreachofcontractcasetotheamountthatAlexpaysfororangesforonemonth.
Thus,ifhepays$1,000.00fortheorangesbuttheexcessrentAlexhastopayfortheremainderofthe
yearsis$12,000.00,Alexwillbeoutofluckbecausethemaximumamounthewillbeabletorecoverwill
be$1,000.00.

Limitationofliabilityclausescanbecomplexandhavealotofnuances.Thelessonhereistonever
ignorethelimitationofliabilityclausebecauseitisoneofthemostimportantclausesthatgovernwhat
happensonceadealhasbrokendown.

AttorneysFees

Thisclauseisafavoriteforlawyersbutshouldnotbeignoredbyanyone.Thisclausegenerallystates
thatifthereisadisagreementaboutthecontract,theprevailingpartyinalawsuitisentitledtothe
recoveryofhisattorneysfees.Asyouprobablyknow,intheUnitedStateseachsidebearsthecostof

itsownlegalrepresentationunlessspecifiedbystatuteorbycontract.Thus,unlessthisclauseis
includedinacontract,intheabsenceofsomespecificcircumstances,eachsidewillberesponsiblefor
payingitsownattorneyregardlessofwhichsidewins.

LetsgetbacktotheinnocentAlexandtoshrewdBob.BobsattorneydraftedthecontractandBob
specificallytoldhisattorneynottoincludeanattorneysfeesprovision.OneyearintothedealBob
stopssellingorangestoAlexthinkingthatitwillcostAlex$10,000.00tosueBobwhilehecanonly
recover$1,000.00underthelimitationofliabilityclausediscussedabove.Ifthereisnoattorneysfees
provision,evenifAlexwinsincourthewillonlygethis$1,000.00whilehemayhavetopayhisattorney
$10,000.00towinthelawsuit.Ifhoweveranattorneysfeesprovisionwasincluded,thenAlexcould
winhis$1,000.00and$10,000.00topayhisattorney.

Moreimportantlyhowever,isthatthisprovisioncanservetopreventmeritlesslawsuits.Ifforexample
BobwantstocountersueAlexclaimingthatAlexspokebadlyaboutBobtooneofhiscustomers.The
realpurposeofthiscountersuitwillbetoraiseAlexslegalfees.Oncethecountersuitisfiled,Bobcan
saytoAlexthatatbestAlexwillrecover$1,000.00andpayhisattorney$10,000.00,moreover,hewill
havetopayhisattorneyanother$10,000.00todefendthedefamationlawsuit.Unlessthereisan
attorneysfeesprovision,BobwillberightevenifAlexwinsbothlawsuits,hewillpayhisattorney
$20,000.00andnotbeabletogetapennyofitbackfromBob.

Theattorneysfeesprovisionisoftentheprovisionwhichlawyersexaminefirstwhentheyadvisetheir
clientsabouttheconsequencesofbreachingacontract.Ingeneraltheattorneysfeesprovision
preventsmeritlesslawsuitsandmakesitmoreriskyforanypartytobreachacontract.Thus,ifyouwant
yourcontracttobesolid,donotignoretheattorneysfeesprovision.

Asmentionedinmypreviousarticle,acontractisonlyasusefulasthesubstancethatitcontains.A
contractaboutthesimplestofsubjectmattercanturnouttobeacomplexdocumentdependingonthe
intentionsoftheparties.Acontractdictatesyourrightsandresponsibilitiesunderaparticulardeal,
thus,youmustalwaysreadandunderstandeverypartofthecontract.Donotignoreasingleword
becauseifyoudoandthedealbreaksdown,chancesare,youwillfindthattheverywordyouignored
wastheonewordthatyoushouldhavepaidattentionto.

IfyouhavequestionsregardingcontractsorotherlegaltopicspleaseemailtheLawOfficeofMichael
MartinovskyatMichael@MartinovskyLaw.com.

Theabovearticledoesnotconstitutelegalortaxadvice.Nothingintheabovearticleisintendedto
createanattorneyclientrelationship.Allinformationintheabovearticleisintendedforeducational
purposesonly.