Anatomy of a Contract (part 3 of 3)

September 22nd, 2008 by


Click the links to get to Anatomy of a Contract part 1 of 3 or part 2 of 3

In part 2 of 3 I mentioned that the “Action” part of a contract is the most important part of a contract; and it is, but mainly because of how it relates to the “insurance” part of a contract. Everything that is discussed below about the “insurance” part is almost useless without a properly written “Action” section of a contract. If however, the “action” portion properly leads into the “insurance” section, you can create a piece of paper that does exactly what it is designed to do, protect your business in case of emergency.

Below are some cut and pasted examples of the “Insurance” section of a contract.

Probably the most important part to be clear on is what happens in case of breach. All too often this section is left out, or is inadequate. The purpose of having a contract to protect you is that in the event the other party does not live up to its obligation, you should not have to go to court as the remedies are already clearly laid out. With a well written contract, even if you do have to go to court, you may be able to succeed at summary judgment and get your attorneys’ fees paid for.

Going hand in hand with breach provisions are the provisions outlining when the contract ends and how it will unwind. This can be a complicated issue and requires a fair amount of foresight to think of the many possible outcomes. Not adequately addressing what happens in certain situations or setting out when the contract should end or unwind can easily leave either party in a lurch and lead to easily preventable litigation.

Finally, there is the boilerplate language. Things such as indemnification, survival, modification, and choice of law. These are all provisions that are standard to every contract and are usually even included in those internet form contracts that you can download and fill-in. While I could go on for pages about little things and tweaks that are often missed, I wanted to mention one provision in particular that is routinely incorrect, even in Attorney generated contracts, and that is the “Choice of Law” provision. Whenever you make the choice of which State’s law should apply, the caveat that the State’s “conflict of law” laws should not apply must be included. Most states have statutes that determine which state’s law should apply in the case of a possible conflict or just multi-jurisdictional deals. So, applying Wisconsin law uniformly also means that you are applying Wisconsin’s conflict of law statutes which tell you to look at Illinois law instead, which is exactly what you did not want to have happen.

This is a brief overview at best of what is involved in drafting a contract, but it should give you a good idea of the types of things that should be included and hopefully impresses upon people the need not just for a written contract, but for a well written contract. As i always like to say, “an ounce of prevention is worth a pound of cure.”