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In today's difficult economic times, the overlooked form agreement requires a careful review. Companies should pay particular attention to "boilerplate" or "form" agreements to be sure that the fine print does not contain onerous details that could trigger disputes. Often businesses sign these agreements without the benefit of legal advice, causing unnecessary headaches later.
Recitals: Recitals state basic facts regarding the organization of the parties and the purposes of the agreement. Some lawyers believe that recitals by themselves cannot be used to help explain the terms in the event of a dispute, since they are not part of the agreement itself. Because of this possibility, businesses should make sure that somewhere in the body of its agreement it has a clause stating that the recitals are incorporated.
Representations: Many agreements require a business to make certain representations, such as that the business is validly organized and can sign a contract, or that there is no pending investigation of the business. These representations often become the topic of a lawsuit because they can be very broad.
For example, if a business states that it has properly paid all taxes, but in reality it is under an audit or it becomes the subject of an audit after the agreement is signed, the party has breached its representations. This breach could cause the entire contract to become invalidated or could cause significant penalties.
Businesses should always make sure that they understand all provisions of an agreement but particularly the representations they give. If any doubt exists, the business should refuse to include the particular representation.
Termination: Businesses should pay particular attention to termination clauses. When the economy becomes challenging, businesses often look for methods to avoid their obligations under an agreement. In many form agreements, termination can trigger a draconian penalty, such as a termination fee. Under California law, these "liquidated damages" provisions may be valid but should be carefully scrutinized.
In other form agreements, businesses have a short window in which to terminate an agreement, such as within the last thirty days of the calendar year. If a business misses the termination window, it can become trapped in an agreement.
Dispute resolution: If initiating a dispute, check the required procedure under a contract. While a business can no longer expressly waive its right to a jury trial, it can agree in advance to binding arbitration, which achieves the same result.
Arbitration consists of a third party deciding a case, based on the facts and circumstances presented to the arbitrator, who may be a retired judge, an experienced attorney or another expert. The decision of the arbitrator has the force of a judicial decree and usually cannot be appealed.
In contrast, mediation consists of a neutral party making a recommendation, and the parties are free to ignore the recommendation or craft their own settlement.
Finally, formal litigation follows strict procedures, is made part of the public record and usually is the most expensive option.
Arbitration can become very expensive as well, particularly if the arbitration provisions contain similar procedures as found in litigation, such as the ability to conduct discovery, requiring written opinions from the mediator or giving the arbitrator an unlimited amount of time to reach a decision.
Further, businesses should watch the dreaded "three-headed" arbitrator clause, found in many form agreements, which requires that three arbitrators (one from each party and a third selected by the other two) decide an issue under the agreement.
Attorney fees: Clients always ask whether they can recover their attorney fees if they win a lawsuit. Unless a statute or contract expressly allows recovery of attorney fees, they are not recoverable, and each party to a lawsuit pays its own fees. However, many form agreements require payment of attorney fees to the winning party. This can act as a litigation deterrent in close cases.
Governing law and forum: Before filing anything, a business should check to see where they are required to file a lawsuit. Many form agreements contain a specific jurisdiction, applying specific law. Courts will respect the law the parties choose to govern their contracts.
Assignment: A business should carefully check to see whether an agreement may be assigned to a successor entity or whether permission will be needed. Often the standard for consent to an assignment requires that withholding consent be reasonable, but it is possible to give the consenting party full discretion to approve or reject an assignment.
Whether a business is looking to hold a party to the provisions of an agreement or looking to terminate an unwanted agreement, the boilerplate clauses of a form agreement can hinder the best plans. It is best to check with legal counsel before signing any agreement, no matter how simple the provisions may seem.
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Ronald Wargo, a partner with the law firm of Friedemann Goldberg LLP, practices in the areas of estate planning, business law and intellectual property. For questions about this article, please contact him at 707-543-4900 or rwargo@frigolaw.com.
