How to review a commercial contract on a budget.

U.S. businesses execute millions of contracts each week. Some established businesses have in-house counsel or trusted outside counsel to guide them on these matters, but a surprising number do not.  And startups rarely have the resources to retain qualified counsel, instead, they trust non-attorney CFO’s and others to review and negotiate contracts.

With so many contracts, and so little time, it’s difficult to read and understand each contract, but failing to read them — or assuming they are all the same — is like playing Russian Roulette.  It only takes one legal problem to bankrupt a business.

To assist non-attorney corporate officers in businesses with tight budgets, here are TermScout’s tips on how to review business contracts:

  1. Understand what you are signing and why.

Too often lawyers and non-lawyers dive right into a contract, scanning each paragraph for provisions they don’t understand or don’t like.  That’s a mistake. Take a moment first to consider what the contract’s purpose is and how it will further your company’s goals. If you understand those things, you will be in a much better position to evaluate the contract’s specific provisions.

  1. Talk to an attorney with expertise in contracts and your company’s specific industry.

The best lawyer to advise you is one with experience in contracts and in your company’s specific industry.  For example, if your company is a healthcare provider, there are numerous laws specific to that industry, such as HIPAA, which governs patient privacy.  If your company is an Internet Service Provider, your lawyer should understand the Digital Millennium Copyright Act. If your company is in the real estate industry, your lawyer should be familiar with the laws governing that industry, including environmental laws.

  1. Protect your IP.

For most companies, intellectual property is one of their most valuable assets.  Your company should review each contract it signs to make sure you’re not assigning unintended rights in your company’s IP.  If you’re sharing confidential or proprietary information with another party, you should also make sure the contract requires that party to protect that information.  

  1. Make certain your contracts comply with privacy laws.

Your business must comply with applicable privacy laws, and if your company collects personal information from European citizens, that includes complying with the General Data Protection Regulation (GDPR).  However, if you are going to share personal information about others with a business partner, it’s vital that you require them to also comply with those laws — and to defend and indemnify you if they don’t.

  1. Have an attorney on standby that can guide you when you are unsure about an issue.

Even if your company does not have in-house counsel or a hefty legal budget, there may still be times when it is wise to have an experienced lawyer review a contract, particularly if you are unfamiliar with the contract provisions.  Many lawyers are eager to develop relationships with young companies and hope to grow with the company.

  1. Use TermScout’s Red Flag Reports to Quickly Summarize Contracts for You.

The dilemma many businesses face is that not reviewing contracts exposes the business to tremendous risk, but paying an attorney to review each contract may be too costly.
TermScout’s
Red Flag Reports streamline your company’s contract review process, saving time and money.  Red Flag Reports can help quickly identify which contract provisions require attention. Sharing the report with your attorney can also greatly reduce your company’s legal expenses by enabling your attorney to focus their time on the provisions that matter and providing them with citations to the provisions in the contract that may be concerning.

Each Red Flag Report contains:

  •  A short description of what the contract means.
  •  A list of red-flagged items in the contract with plain English explanations of the issues and citations to the exact provision in the agreement so you can quickly dive deeper when needed.
  •  Answers to the top questions that matter in the specific agreement type.  Subscribers or large orders can customize the questions that TermScout answers in each agreement type.
  • A fairness rating to show how the contract compares to similar contracts in the industry.
  • Peace of mind.  Rest assured that we’ve read the entire agreement and alerted you of the major issues.

While TermScout is not a law firm and can’t offer legal advice, our extensive experience in reviewing contracts in many industries (and court decisions arising out of litigation involving such contracts), enables us to know what provisions are standard, what provisions need attention, and how a given contract compares to similar contracts in the given industry. For more information about Red Flag Reports or TermScout’s other products email .

Authors

Mark Cohen

Advising Attorney, TermScout  

Flirting With Disaster: The Dangers of Not Reading Business Contracts.

We get it. Managers are busy. Reading contracts takes time. After a while, managers may feel all contracts are the same. With so much to do, it is tempting to skip the fine print, particularly given that so many lawyers draft contracts in an unnecessarily verbose style filled with “legalese.” But not reading a contract is dangerous and could expose you to personal liability.  

Here are the five things you must know if your role in your company has anything to do with executing contracts:

1 – Corporate directors and officers have a legal obligation to act responsibly and in the best interests of the companies they manage. In some cases, managers have been held personally liable for breaching these legal duties. One such duty is the “duty of care”, which generally includes the duty to make careful, informed decisions by assuming an active role throughout the entire decision-making process. Generally, managers can avoid liability  if they follow these guidelines:

     – Assure themselves that they have the information required to take action
     – Devote sufficient time to reviewing such information; and
     – Obtain, if useful, the advice of experts

2 – It doesn’t matter whether you read or understood the contract. A fundamental principle of law is that one who signs a contract is presumed to have read it, understood it, and agreed to it. Put simply, if you sign it, your organization is stuck with it, and any attempt to modify or nullify it will likely be costly, time-consuming, and unsuccessful.

3 – Contracts vary wildly. There are 1.35 million lawyers in the United States, and clients generally pay them to draft contracts favorable to them, not your organization. If you don’t understand a contract you sign, you’re playing Russian Roulette with your company.

4 – Contracts are not all “boilerplate”. Most contracts contain legally binding terms covering issues such as:

– Dispute resolution
– Limitations on damages
– Indemnification
– Attorney’s Fees
– Forum selection
– Remedies
– Insurance
– Representations and warranties

These things matter.  A lot. Properly drafted, these provisions help an organization minimize the risk of litigation and maximize the odds of a good outcome if the parties can’t resolve the dispute.

In a study of SaaS click-through agreements, TermScout found that software vendors require the customer to take on significantly lopsided terms with respect to risk allocation more than 95% of the time.  Typically this means that if something goes wrong, such as a data breach or third-party lawsuit, the customer is much more likely than the software vendor to suffer a financial loss.


5 – The past does not predict the future. If you’ve been signing contracts blindly and getting away with it, kudos to you.  But don’t assume that just because there was no problem in the past a problem won’t arise down the road. It’s unusual for serious contract disputes to arise, but when they do the outcome can make or break a company.

If an organization has access to legal counsel, managers may rely on them to review proposed contracts and identify potential issues. Those lawyers should scrutinize contracts for ambiguities, inconsistencies, and important issues the proposed contract fails to address altogether.  

If an organization does not have access to counsel, even experienced managers may be tempted to sign a contract without carefully reviewing it and fully understanding it.  However, unless those managers are lawyers, they may not understand the risks they take on when signing contracts for their companies. They may be obligating their organization to unnecessary commitments or agreeing to a contract that omits important protections for the organization. When those contracts turn out to be problematic for the company down the road, shareholders may be able to bring a claim for breach of the duty of care if the manager cannot show that they took proper precautions.

Though reviewing contracts takes time, new solutions are emerging that make contract review more affordable and accessible for growing businesses. One solution is TermScout’s Red Flag Reports, which help you quickly and confidently determine which contracts are okay to sign and which ones are not. Click here to learn about Red Flag Reports and how you can limit your risk for as little as $119 per document.

Authors

Mark Cohen

Advising Attorney, TermScout  

Indemnification 101

This article provides an overview of indemnity clauses.  Lawyers use these to allocate risks in transactions.

Disclaimer: Indemnification provisions are complex.  This article is an introduction; it is not a substitute for a lawyer’s advice.

What is Indemnification?

Indemnification is the right of a party that is legally liable for a loss (the indemnitee) to shift that liability to another party (the indemnitor).1  The goal is usually to shift responsibility for any damages that occur from the party that is sued for such damages to the party that caused them.  Here’s an example:

In this transaction, ABC Motor Co manufactured the car, but Springfield Dealership sold the car to Joe.  If ABC’s act or omission harms Joe, such as a manufacturing defect or failure to install a safety feature which company should be liable?

Joe will likely sue both.  Springfield may lack the resources to defend the suit, and it should not have to because it did not design or manufacture the car.  However, as a condition of agreeing to be an ABC dealership, Springfield could insist on an indemnity clause to shift this risk to ABC.  Essentially, that clause would say, “If Joe is hurt and it’s your fault, you must defend us and pay any judgment Joe obtains against us.”

Indemnity provisions traditionally refer to claims brought by third parties, such as Joe in the above example, (third-party claims) but may also apply to claims between the parties (first-party claims or direct claims), if the provision clearly states the indemnity applies to first-party claims or is written so broadly that a court could interpret it that way.2  However, this is not typical, and in practice parties often limit indemnification to third-party claims and address liability for first-party claims (such as breach of contract) elsewhere in the contract (e.g., the limitation of liability and attorneys’ fees provisions).

What is a Duty to Defend?

An indemnity clause may include a duty to defend.  A duty to defend, if specified, requires the indemnitor to defend the indemnitee in a legal action. This could be critical because the indemnitee may lack the resources to defend a suit (like Springfield in our example), while the indemnitor may have the resources to fight the suit (like ABC).  An indemnitee with significant resources sued by a third party may prefer to defend itself and seek reimbursement from the other party for costs and attorney’s fees when the matter is resolved.  By the same token, the indemnitor may prefer to control the defense because the indemnitor will ultimately be liable for any losses the indemnitee suffers.  In such a case, the indemnitor will often include language in the indemnification provision requiring the indemnitee to hand over control of the defense if it wishes to be indemnified.

What Does “Hold Harmless” Mean?

An indemnity clause may sometimes include a promise by each party to “hold harmless” the other party.  Most courts treat the terms “indemnify” and “hold harmless” as synonymous, but a few have held that the words imply different obligations.3  The inclusion of “hold harmless” has also led to litigation over whether the indemnitor must advance defense costs to the indemnitee.4  “Hold harmless” language may also open the door to claims that one party agreed to release the other from responsibility for its own negligence.5

Things to Look for When Reviewing Indemnity Provisions 

Below is a list of some issues you should consider when reviewing an indemnity provision:

1. Does the provision cover only third-party claims, or does it also cover first-party claims? Courts may interpret provisions purporting to apply to “any claims” to apply to first-party claims. 6

Tip: Insist on clarity regarding whether the indemnity provision applies to first-party claims.  A simple way to eliminate ambiguity is to include a provision stating, “This indemnity provision applies only to third-party claims.”

 

2. Is the indemnity provision consistent with other provisions? A good indemnity provision makes clear that any limitations on liability elsewhere in the contract do not apply to the indemnity obligations. In the example above, if ABC’s act or omission harms Joe, there should be no limit on ABC’s liability to Springfield under the indemnity provision – ABC should pay Springfield the full amount of any damages Springfield suffered when Joe sued Springfield for injuries ABC caused. It’s also important to make sure the indemnity provision does not conflict with other contract provisions such as the insurance, contribution, or attorney’s fees provisions. 

Tip: To avoid potential conflicts between the indemnity provision and other provisions, consider including a statement such as this: “The parties do not intend this indemnity provision to alter any other provision in this Agreement.  If there is a conflict between this provision and any other provision, the other provision governs.”

 

3. Who are the indemnitees? Some indemnity provisions require the indemnitor to indemnify the other party and that party’s affiliates, e.g., shareholders, officers, directors, employees, agents, etc. If there are third-party beneficiaries to the contract, the contract should address whether they also get the benefit of the indemnity provision.

Tip: Define the indemnitees.  Consider a provision such as this: “Where this indemnity provision imposes a duty on a party to indemnify and defend the other party, the duty extends to the other party’s affiliates, including its shareholders, officers, directors, employees, and agents.”

 

4. What are the covered events? Does the duty to indemnify arise only from the indemnitor’s breach of the agreement or does it also arise from any act or omission of the indemnitor even if that act or omission is not a breach?

Tip: Insist on clarity regarding what acts or omissions will trigger the duty to indemnify.  Consider a provision such as this: “This indemnity provision is not limited to acts or omissions that constitute a breach of this agreement.”

 

5. What are the covered damages? It is important to identify what the indemnitor must pay. You may think, “” are redundant, but each has a different meaning.

Tip: Most courts strictly construe indemnification provisions against the indemnified party, so the parties should include language covering all types of damages they intend to cover.  In some cases, the parties may want broad language such as, “All damages, losses, liabilities, claims and causes of action of any kind.”  In other cases, they may want to narrow the scope of such language to particular types of claims such as personal injury and death, real and personal property damage, infringement of intellectual property, breach of confidentiality, and/or violations of the law.

 

6. How much connection is required between the event giving rise to the duty to indemnify and the indemnitee’s damages? Some indemnity provisions may contain broad language that establishes a duty to indemnity the other party for all damages “related to” or “arising from” the agreement. Others may be narrower and establish a duty to indemnify only for damages “caused by” or “resulting from” the indemnitor’s acts or omissions.

Tip: Generally, the indemnitee wants broad language such as “related to.”  The indemnitor wants more narrow language that excludes damages unrelated to the indemnitor’s acts or omissions. To narrow the duty, the parties may use phrases such as “caused by, “resulting from,” or “solely resulting from.”

 

7. Does the provision include a duty to defend? If it does, does it specify which party will choose the lawyer that will defend the indemnitee and which party will make decisions about the defense?

Tip:  Don’t settle for a vague provision regarding the duty to defend.  Insist on language that addresses which party will choose the lawyer that will defend the indemnitee and the level of control the indemnitor and indemnitee will have in such litigation.

 

 Conclusion

Indemnity provisions are common but require careful review.  In analyzing an indemnity clause, you should understand the difference between first-party claims and third-party claims.  You should also understand the distinction between the duty to indemnify and the duty to defend.  You should also check for “hold harmless” language that may result in unintended consequences.  Always consult a qualified lawyer if you have questions or concerns about a legal document.

TermScout can help

If you are a business or consumer and you are considering agreeing to a click-through vendor contract, consider having TermScout review the document for you first.  We distill complicated legal clauses like indemnification, risk allocation, limitations of liability, intellectual property, and many others into plain English.  We will even compare the important terms to the terms competitors use in the industry and rate how they stack up against one another.

Not only can we assist you in deciding whether to sign a document, but our products may also inform your decision on which vendor to choose.  Check out our website to learn more about the services we offer.

Disclaimer: We are not a law firm, and this information is not legal advice. We will not and do not represent you and the use of our services will never establish an attorney-client relationship or constitute legal advice.

1 American Transtech, Inc. v. U.S. Trust Corp., 933 F.Supp. 1193, 1202 (S.D.N.Y. 1996).
2 Hot Rods, LLC v. Northrop Grumman Sys. Corp.,  242 Cal. App. 4th 1166, 1170 (Cal. App. 2015); See also Hooper Assocs. v. AGS Computers, 74 N.Y.2d 487 (N.Y. 1989).
3 See, e.g., Queen Villas Homeowners Association v. TCB Property Management, 56 Cal. Rptr. 3d 528, 534 (Cal. Ct. App. 2007) (“Indemnify” is an offensive right allowing an indemnitee to seek indemnification. “Hold harmless” is defensive — the right not to be bothered by the other party itself seeking indemnification.).
4 See, e.g., Majkowski v. American Imaging Management Services, 913 A. 2d 572 (Del. Ch. 2006).
5 See, e.g., Rooz v. Kimmel, 55 Cal.App.4th 573, 582 (1997) (Hold harmless provision prevented plaintiff from recovering damages resulting from defendant’s negligence).  See also, U.S. v. Contract Management, Inc., 912 F. 2d 1045 (9th Cir. 1990).
6 Hot Rods, LLC v. Northrop Grumman Sys. Corp.,  242 Cal. App. 4th 1166, 1170 (Cal. App. 2015).

 

Authors

Mark Cohen

Advising Attorney, TermScout  

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