Almost everyone has entered into a contract at some point, whether in business or in her or his personal life. Despite the ubiquity of contracts, many people don’t give much (if any) thought to protecting themselves on the back end of an agreement.
The reason for this is simple: Few people enter into a contract contemplating that the relationship will fail. Their focus is on getting the deal done. The parties negotiate. They agree on terms. They write them into the contract. Then the parties proceed under those terms.
But what happens when things go south? That is when contract terms that many parties overlook as inconsequential “boilerplate” language can really make a difference. These terms can and should be negotiated like prenuptial clauses, dictating what happens when the relationship is broken.
Here are five relatively common contract clauses everyone should consider.
1. “Choice of forum” clause. In the event of a legal dispute, where will the case be heard? If two parties to a contract are located in different states, a choice of forum provision can greatly affect the convenience of potential court proceedings. For example, if a person or business in Hawaii enters into a contract with a person or business in Texas, the parties might want to agree on whether any future disputes are heard by courts in Hawaii, Texas or even another forum. Litigating in another state can be expensive and disruptive.
2. “Alternative dispute resolution” clauses. Perhaps the parties would rather not be in court at all. Alternative dispute resolution, usually private mediation or arbitration, can provide alternative means for parties to resolve their disputes. There are many reasons why parties choose private alternative dispute resolution over the courts, including the potential for greater confidentiality, scheduling flexibility and possible reduced costs. However, there are times when the courts are preferable, so these provisions should be considered carefully in the context of the contract itself.
3. “Attorney’s fees” clause. Taking a complex dispute through trial or arbitration can cost hundreds of thousands of dollars or more. Provisions in a contract allowing the prevailing party to recover attorney’s fees can both dissuade frivolous lawsuits and also provide an incentive for the parties to settle rather than risk having to pay for both parties’ attorneys. If Hawaii law applies to the contract, there is a statutory provision that allows reasonable attorney’s fees up to 25 percent of the amount in dispute to be awarded to the prevailing party. Many other jurisdictions, however, do not have similar fee-shifting statutes for contract disputes.
4. “Entire agreement” clause. This clause, also known as an “integration clause,” makes clear that the agreement being signed supersedes and replaces any and all prior agreements, promises, arrangements, etc. This means the new contract is the entire contract, and no prior agreement governs the parties’ relationship.
5. “No representation/no reliance” clause. This clause says that neither party has relied upon any representations or promises by any other party, including attorneys, unless it is expressly stated in the contract. This can help avoid messy claims about who said what leading up to the contract. This clause can be particularly useful if any parties claim they were tricked or fraudulently induced into entering into a contract.
