The Most Overlooked Key to Good Contracts

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There is a saying in building, “measure twice, cut once.”  This same principle applies when drafting and negotiating contracts.  Too often, businesspeople and corporate lawyers draft dispute resolution clauses without fully appreciating their implications – – because they are not the ones enforcing or defending them in court.  As a trial lawyer, I have exploited contract provisions that the other side thought were bullet proof.  I also have had to break the bad news to clients that their contract doesn’t protect them on certain issues.  Based on these experiences, I advise all my clients to have a litigator review their contracts before they are signed.  Let me give you a few examples of how doing this can save you a lot of time and money if a dispute arises.

As a trial lawyer, I have exploited contract provisions that the other side thought were bullet proof.

Choice of Law and Venue Provisions

Many drafters rightly include a choice of law provision (which specifies the state law governing the contract) but fail to add an exclusive jurisdiction/venue provision (stating where the dispute will be resolved).  This omission can lead to mismatches – – particularly where the parties are located in different states.  Consider a Massachusetts company contracting with a Texas company.  Without an exclusive jurisdiction provision, the Massachusetts company may find itself asking a Texas judge to apply Massachusetts law.  Worse, the Massachusetts company may find that Texas public policy voids certain contract provisions that would otherwise be enforceable in Massachusetts.

The scope of the choice of law provision also must be considered.  Drafters sometimes limit the choice of law to “interpretation” and “enforcement” of the contract.  An experienced litigator will tell you that contract disputes often include claims for business torts (e.g., unfair and deceptive trade practices, theft of trade secrets, misrepresentation, professional negligence, etc.)  And the law of the venue typically governs those tort claims.  To mitigate against this risk, broader language should be included to ensure that the choice of law applies to “any and all disputes between the parties.”

Limitation of Liability Provisions

The same is true for limitation of liability and indemnification clauses, which cap the parties’ exposure and apportion risk in the event of a dispute.  Most drafters are not focused on lawsuits or the types of damages that may be recoverable.  An experienced litigator, however, recognizes both the potential claims that may arise as well as the available remedies.  The litigator will tailor the language to remove the risk of unforeseen liability such as consequential, exemplary or punitive damages.  Additionally, the litigator will know when certain types of damages will be difficult to quantify and how to account for that with a carefully crafted liquidated damages clause.  In sum, the litigator will ensure that the company’s risk is equal to its reward under the contract.

Injunctive Relief Provisions

One of the most common litigation clauses in contracts concerns the propriety of injunctive relief (i.e., court orders) to enforce certain terms.  These clauses are used in employment agreements that contain non-compete or other restrictive covenants (e.g., non-solicitation, confidentiality, etc.) and business contracts where the parties are sharing confidential information (financials, trade secrets, etc.) or developing/licensing intellectual property.  The clauses are intended to make it easier for a non-breaching party to secure a court order enforcing the contract during the dispute (i.e., a temporary restraining order or preliminary injunction) and thereafter.

Most drafters know that to obtain a preliminary injunction, a party must demonstrate that they will suffer irreparable harm.  Thus, they include language acknowledging that a breach will cause irreparable harm and warrant injunctive relief.  But too often the drafter stops there.  An experienced litigator, however, knows that courts require a party seeking a preliminary injunction to post a bond in an amount sufficient to compensate the other party if they are later found to have been wrongfully enjoined.  See, e.g., Fed. R. Civ. P. 65(c) (requiring “security in an amount that the court considers proper to pay the costs and damages sustained by any party found to have been wrongfully enjoined or restrained.”); 18 U.S.C. Sec. 1836 (Defense Against Trade Secrets Act of 2016).  The cost of posting such a bond, moreover, can be significant and sometimes cost prohibitive.  An experienced litigator knows that the parties can waive the bond requirement by agreement.  Thus, adding a bond waiver provision to the employment agreement would avoid this significant expense.

These are just a few examples of where involving a litigator at the outset may avoid significant expense down the road.  There is nothing worse than learning from a judge (or jury) that your contract does not provide the protections that you thought it did when you signed it. 

 If you would like our team to review and assess your contracts, please contact Dana Zakarian.