When drafting and negotiating contracts, much attention is deservedly paid to indemnification, limitation of liability, dispute resolution, and similar provisions. Unfortunately, those involved in drafting and negotiating contracts often overlook some of the most basic and important provisions.
- Whenever you are planning to enter into a contract, you should always ask yourself the following questions:
- What am I trying to accomplish in this contract? Said a different way, what am I trying to get from the other side in this contract?
- What am I trying to avoid in this contract? Again, another way of saying this would be: What am I trying to make sure the other side does not get out of this contract?
What is unique about my business or this particular contract that should require my specific attention?
Today’s very difficult economic times are bringing certain contractual provisions into play that many view as boilerplate and in the past often received little or no attention. It is easy to fall into the trap of using standard boilerplate language for provisions such as: the term of the contract; pricing and price adjustments; payment terms; delivery times; bankruptcy provisions; and the types of raw materials that may be used in producing a product for a customer. But now, many people are pulling out their contracts with their customers and suppliers and reviewing those terms as they struggle with issues that have arisen due to, among many others: dramatic increases in the cost of raw materials; the inability to obtain raw materials at competitive prices due to the scarcity of raw materials; dramatically higher fuel costs; and the inability to obtain bank loans or other credit as easily as in the past.
Let’s take raw material costs as one specific example. If your business purchases or manufactures products for which oil is a significant input, or if you are in certain food markets, you have probably seen the cost of those raw materials and other inputs increase at a very rapid rate recently. If you are the buyer and have a long-term contract with a supplier who uses oil or certain foods as inputs, then you may be pretty happy as your contract with your supplier may not allow the supplier to increase its price due to such raw material price increases. But if you are the seller, you certainly want your contract to allow you pass along price increases to your customers.
Careful planning is the key. Those who recognized the importance of negotiating provisions that dealt with these types of issues are probably better off than those who did not. On the other hand, many businesses have failed or are suffering through very difficult times because their contracts did not anticipate these issues.
Another common pitfall in contracts in general is not paying careful attention to schedules, exhibits, or other attachments to the contract. You may negotiate an 80-page supply agreement with your biggest customer. You may know almost every single word of the contract itself, and you may have carefully negotiated all 80 pages to provide important protections to your company. However, often times those 80 page contracts attach schedules and exhibits and people too often relax and do not give the exhibits and schedules the attention they deserve. For example, the body of the 80 page agreement may have a general discussion of the services that are to be provided by one company to the other. It may then refer to an attached schedule for a more detailed description. After the contract is signed, if the party receiving the services believes that the other party is not performing certain services, the receiving party better be able to point to something specific in the schedule of services if it wishes to bring a claim against the other party.
So think about these sorts of issues the next time you begin discussions on a new contract. Doing so may allow you to have the flexibility that you need when circumstances change quickly or unexpectedly. Also, pay attention to those exhibits and schedules. They are usually just as important as the main body of the contract itself.