So You Are Presented with a Form Contract?

What About It?

When you or your company is presented with a form contract prepared by the other side in a transaction, red flags should go up. This is because the other side in the transaction has had its lawyers draft the form contract in order to maximize the interest of that party – that is what lawyers usually do for their clients.

Maximizing interest can take the form of setting forth only the obligations of the opposing party without setting performance obligations for the drafting party. Or a form contract often limits the damages that may be pursued against the drafting party without setting similar limitations for the opposing party.

Here are some additional items to be on the lookout for:

Indemnity and Hold Harmless Provisions in a Form Contract

The other side will often insert language that you or your company will be responsible for any and all claims that arise out of the contractual arrangement. Don’t agree to it. It is certainly appropriate for you to agree to be responsible for any claims that arise out of your errors or omissions, but you do not want to be in the situation of agreeing to hold harmless or indemnify some other party for its shortcomings.

Venue and Jurisdiction in a Form Contract

Many times a form contract will state that any dispute about the contract or its performance shall be brought exclusively in the home courts of the other party. Don’t agree to it. You never want to agree that you can be hauled into court in some distant place where the cost of litigation and inconvenience is far greater than would otherwise be the case. The best rule is for the contract to be silent on courts and venue as there are general principles of law that allow either party to bring a claim in a court that has significant contacts with the subject matter of the dispute and where the parties are registered or have done business. At the worst, try to compromise so that any claims against you must be brought in your home county, and any claims against the other party to the contract will be brought in its home county.

Arbitration Clauses in a Form Contract

Arbitration is another way for disputes to be resolved privately rather than in a court. One of the main drawbacks of arbitration is that the parties have to pay the fees of the arbitration company and for the arbitrator(s). Except for a relatively modest filing fee, the courts and judges are free – subsidized by all taxpayers. Also, if arbitration is agreed to, it is much more economical to conduct arbitration under the arbitration code of the state where the matter will be heard rather than to use the American Arbitration Association or some other arbitration group which charges stiff up-front fees and significant hourly rates for the one or three arbitrators who preside. Arbitration under the law of the state gives the same protection as arbitration in general, but administration fees to an outside company are avoided and the parties together can select the arbitrator or have one appointed by a local court.

These are not the only items of concern that might be found in a form contract, but they are three that often arise.

form contract

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