In any business transaction, it is important to put the terms of the parties’ agreement into writing. However, as most businesspeople are aware, the typical written agreement, on its face, appears to go far beyond merely re-stating the parties’ business deal. This article provides a brief explanation of some of the basic contract terms that are typically incorporated into business agreements.
“Consideration" is an all-encompassing term for the compensation—whether it be cash, a promissory note, products, services, attribution or something else—that the parties transfer to one another pursuant to their contractual relationship. As alluded to in the previous sentence, consideration can take numerous forms, and the precise value of a party’s consideration may not always be readily determinable. Since the parties’ exchange is often the impetus behind the contract in the first place, the consideration provision needs to be thoroughly addressed and carefully drafted.
Even where one party’s consideration is purely monetary, thoughtful analysis and drafting are still required. For example, it is not uncommon for a client to come to me and say they are going to receive “five percent" in a transaction. Is this five percent of gross? Of net? If net, how is “net" defined? Will this five percent be paid in perpetuity, or only for a limited period of time? If derivative products are developed, will these be subject to the same percentage? These are just some of the issues that need to be considered when outlining the economic terms of the parties’ agreement.
Representations and Warranties
Representations and warranties are critical in many business contracts, and can serve multiple purposes. On the most basic level, representations and warranties can be used to confirm that the individuals signing the contract have the authority to do so on behalf of their owned entities/employers. Getting into more detail, these provisions can be used to address concerns that one party may have about the other’s capabilities, security practices, ability to meet certain deadlines, and other pre-existing business relationships. In deals involving contingencies or where a large amount of money is at stake, representations and warranties can be some of the most important provisions in the agreement.
Non-Competition, Non-Solicitation and Non-Disclosure Covenants
Most businesspeople are at least familiar with the term “non-competition covenant." Non-competition covenants serve to prevent one party from operating or providing services to a competing business in a certain geographic area for a limited period of time. Non-competition covenants are often highly scrutinized and disfavored by the courts (in some states, they are entirely unenforceable), and so they must be appropriately limited in scope in order to make sure that they will not simply be disregarded.
In addition to non-competition covenants, non-solicitation and non-disclosure provisions are also available to protect contracting parties’ business interests and intellectual property. In certain circumstances, a simple non-solicitation or non-disclosure provision may be all that is required. These provisions are more commonly considered acceptable than non-competition covenants, and when carefully written to adequately cover the affected party’s interests (e.g., customer lists, trade secrets, proprietary systems), they can be valuable tools for facilitating agreements and developing reliable relationships.
An often over-looked consideration in developing business relationships is the parties’ respective rights of termination. If the contract does not contain any express rights to terminate, in many cases, the only remedies available to a party facing non-performance or deficient performance by its counterpart are in the nature of financial compensation for harm suffered, injunctive relief, or in certain circumstances, an award of specific performance. Specific performance is a judicial award directing one party to a contract to live up to their contractual obligations, and except in certain limited circumstances, is not available to enforce an agreement to provide a service (as opposed to delivering a product).
While appropriate in certain circumstances, providing for express rights of termination will not always be in both parties’ best interests. Termination rights are often heavily negotiated, and rightfully so.
The “Integration" or “Entire Agreement" clause often appears in the litany of boilerplate clauses listed at the end of the contract. However, this provision is of critical importance, and it is important that it be understood.
Integration provisions provide that the written contract constitutes the entire agreement and understanding between the parties, and that no previous written agreements or oral promises will be enforceable. In this way, the integration clause serves to provide the parties with a clean slate as of the time the agreement is executed. This clarity is of fundamental importance to entering into a sound agreement, and parties should be very wary of contracting with others who seek to avoid the effects of integration.
In addition to these core issues, there are numerous other boilerplate-type and transaction-specific provisions that need to be addressed and mutually understood before the parties settle on their agreement. By thoroughly analyzing and developing the relationship, parties can avoid costly and unnecessary ambiguities and disputes later down the road.
This article first appeared on www.365daysofstartups.com.