The Four Most Important Legal Terms in Your Business Contract

Frequently we are retained to assist business owners in resolving contractual disputes.  Just as frequently, the dispute centers around a contract that never received any type of legal review and therefore has many loopholes, missing terms, and sometimes the contractual terms actually conflict with each other. Our recommendation is always if a deal is important enough to document in a contract, then the written document is important enough to be reviewed by a lawyer.  Today I want to address the four most important legal terms in your business contract.

The first is that the contract provide for the controlling law that will govern interpretation of the contract terms.  In other words, the contract should provide that the interpretation and resolution of any issues regarding its terms be governed by a specified state's laws.  Usually the contract provides that the state of incorporation of the business or the state where the primary location of business operations  is located controls.  It is important to specify the controlling law or you could end up litigating your Florida company's claim based upon Iowa law which is not a good place to be.

Secondly, the contract needs to specify the state, including the county where applicable, where any disputes including litigation must be resolved.  If you do not provide this term in the contract then the parties are free to sue wherever they desire.  So while you may expect to litigate any contractual disputes in Florida, the other party to the contract may expect to file suit and litigate in the state where their company is domiciled which might be California.  Obviously, the issue of situs of litigation also brings up cost factors which need to be considered but it is always preferable to litigate where your business office is located and/or where the owner or owners reside.

Third, the contract needs to specify the length of the contract and how and when the contract can be terminated.  We see contracts all the time that are what is known as "evergreen" contracts meaning they have no end.  Often that same contract does not specify any way to terminate the contract regardless of whether the contract is breached by the other party or the parties simply want to end the arrangement.  This creates quite a problem particularly when one party breaches the contract and the other party wants to terminate. However, if the contract has no termination provisions, how do you do that?  We have dealt with that dilemma many times.

Finally, the contract should have provisions that address what the procedure is for modifying a contract.  No one can predict the future and many times contracts need to be modified to address a changing business environment, a change in the law that impacts the contract or a change in the business needs of the parties.  The procedure by which such changes may be mutually agreed to by the parties is definitely a necessity and should be clearly spelled out.

The Lerman Law Firm strongly recommends that business owners have all contracts reviewed by a lawyer before execution.  It can save a lot of time, money and headaches for everyone involved.