As we emerge from the effects of a global pandemic that has impacted every sector of the business community, one of the lessons learned is a renewed focus on the vital role that contracts play in our business dealings. From basic purchase orders, to master contract agreements, the terms and conditions of our contract documents are now framed front and center. Below is our Top 10 list of provisions that should be considered in your contracts (not in order of importance).
1. Price and Scope
Crystal clear price and scope at the beginning of every contract is essential. What is being included, what is being excluded? Is the cost a lump sum, or is it based on additional factors? What are the payment terms? The more clarity you have on price and scope, the less likely you are to dispute these essential terms with your customer once performance begins. If your customer provided you a proposal that you accepted, consider copying the scope of that proposal directly into your contract.
When is performance expected? Are strict deadlines set forth in the contract? Is your customer obligated to provide with you a schedule or is the schedule obligation on you? Ensure that any discussion of schedule within the terms and conditions contains a “time is of the essence” clause to ensure that performance will occur in a prompt fashion.
Speaking of schedule, is there a measure for damages if one party does not perform on time? Many contracts contain liquidated damages clauses that contain the measure of damages should performance be late. Is that liquidated damages amount reasonable? Likewise, it is often recommended to have a mutual waiver of consequential damages. This waiver ensures that one party cannot come after the other party for things such as lost profits, loss of use, etc. should performance of the contract be delayed.
A good contract contains a strong defense and indemnification clause. Something that obligates your customer to defend and indemnify you from third-party claims related to their performance. Should they make a mistake, and that mistake results in claims against you, a strong clause is needed to ensure they will indemnify you from that mistake. Make sure your indemnification clause complies with California law in order to be enforceable.
Accompanying any good indemnification clause is detailed insurance requirements. What insurance will you require? Commercial general liability insurance is typical, but what about other insurance protections, like professional liability, or pollution? Every contract is different and so the insurance requirements are different. Consider adding the insurance requirements as an attachment sheet to the contract so they can be changed depending on the specific contract work.
How are you treating extras and change orders? Creating terms and conditions for the allowance of extras is critical. Timely notification of extras, detailed price proposals for the extra work and documentation of the costs should be included. A good contract should also include reservation of rights language that provides if the parties cannot come to an agreement on the cost of the extra, the work will be performed under protest. This is important to ensure that the underlying performance does not come to a standstill while the parties dispute an extra.
If the performance of the contract is not satisfactory, how is default and termination dealt with? Contracts should contain detailed information about the grounds for default, including failure to meet schedule, failure to adequately perform the contract work, legal violations and other deficiencies in performance. Consider including a default provision which gives the other party 48 hours to cure the default. If the default cannot be cured, termination of the contract is the next step. We always recommend providing for default before termination. What is the difference between a default and termination? A default can be cured; a termination cannot.
How will the parties treat claims? Claims for additional compensation/ Claims for additional time to perform. Most good claims clauses obligate a party wishing to assert a claim to provide timely notice and details related to the claim. If the party wants additional time or money, promptly submit supporting documentation entitling that party to more time or money is critical. Include language providing that should a party fail to timely submit a documented claim, that claim is waived. Timely notice of a claim is important to the other contracting party in order to mitigate the damages of the claimed item and its cost.
9. Dispute Resolution
If the parties have a dispute how will it be resolved? Will the parties arbitrate a dispute, or litigate the dispute? Venue for any dispute should be where the performance of the contract occurred, not some foreign location. Depending upon the circumstances of the contract, a prevailing party attorney’s fees clause may be included to ensure that if a dispute is brought over the contract, the winner gets to recover their reasonable attorney’s fees. Dispute resolution clauses are specific to the type of contract involved. There is no “one size fits all” solution.
10. Compliance with Laws/Regulations
Ensure that your contracting party is obligated to comply with all laws, and applicable regulations. If there are certain industry standards required for the performance the work, identify those standards and ensure your customer is meeting them. Those standards need to be specifically addressed in the contract to avoid confusion later. Failure to comply with laws/regulations can lead to a default and termination.
For more information about the surety’s obligation to arbitrate a dispute please contact Principal Attorney Colin K. McCarthy, firstname.lastname@example.org.
The information contained herein is not advice and should not be treated as such.