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Drafting a Sound Contract: A Checklist of Important Contractual Provisions

As Samuel Goldwyn, a famous film magnate, once proclaimed a verbal contract isnt worth the paper its written on. Practice shows, however, that a poorly drafted written contract is not much of an improvement. Drafting a sound contract one that protects your clients interests and provides value goes far beyond the essential elements of a valid contract; it should establish the ground rules, encompass the entire agreement of the parties, and provide the agreement with teeth.

After litigating contracts, both the skillfully tailored and the abominable, the utility of certain contract provisions becomes readily apparent. Whether a clause is considered essential will vary depending on the contracts specific purpose, but each of the following provisions should be considered when drafting your next contract.

Scope of Services Clause

If the contract you are drafting is for the provision of services, draft and include a specific description of the number and type of services that will be provided under the contract. By specifically delineating the services provided under the contract, your clients exposure to liability will be limited for acts or omissions that fall outside the scope of the delineated services.

Third Party Beneficiaries Clause

The names of the parties including any intended third party beneficiaries should be clearly stated. Generally speaking, persons not in privity to the contract are not proper parties for litigation. A court will not imply third party beneficiary status; an agreement must clearly and fully express an intention to confer a direct benefit to the third party. If your intent is to confer benefits on a third party, include clear and concise language doing so.

Forum Selection Clause

A forum selection clause allows the parties to agree to initiate any litigation arising from a contract in a specific forum. Not only will this provide certainty for your client by dispelling any confusion about where suits arising out of the contract must be filed and defended, but also it will save your client money by avoiding travel to distant forums to litigate. Contractual forum selection clauses are prima facie valid and must be enforced unless the party opposing enforcement of the clause can clearly show that (1) enforcement would be unreasonable or unjust, (2) the clause is invalid for reasons of fraud or overreaching, (3) enforcement would contravene a strong public policy of the forum where the suit was brought, or (4) the selected forum would be seriously inconvenient for trial.

Choice of Law Clause

While a forum selection clause may be used to keep litigation in a particular forum, a choice of law provision determines the substantive state law used in that chosen forum. Choice of law provisions provide predictability by allowing parties to choose familiar and favorable laws to govern a transaction. Choice of law concerns emerge whenever a cause of action has a significant relationship to more than one state or nation. Some states allow parties, within limits, to specify in their agreement that the law of a specified jurisdiction will apply to their agreement. When drafting your next contract, be sure to check your states rules regarding the enforceability of contractual choice of law provisions.

Merger Clause

Parties to a contract frequently make preliminary oral agreements that they intend to reduce to a written contract. These preliminary terms often differ from the terms contained in the final agreement. A “merger clause” is a contractual provision mandating that the written terms of the contract may not be varied by prior agreements because all such agreements have been merged into the new document. Avoid the unexpected merger of prior terms or the introduction of extrinsic evidence to prove prior, unrecorded agreements with a provision stating that the agreement is completely integrated. Language stating that the agreement sets forth the final, complete and entire agreement of the parties and supersedes any prior agreement or understanding can be used to bar the introduction of preliminary terms that vary from the contract in its final form.

Alternative Dispute Resolution Clause

Those who appreciate the speed, relaxed rules of procedure and evidence, and ability to resolve a dispute outside the judicial system should include a mandatory mediation or arbitration clause in the contract. This clause should call for the submission of any disputes arising under the contract to mediation or arbitration. There is no special language required when including mediation or arbitration clauses, because the general rules of contract interpretation will govern any dispute resolution clause. In some consumer transactions, however, it is required that mediation and arbitration clauses be conspicuously printed.

Limitation of Liability Clause

Limitation of liability provisions are often included in design and construction contracts to manage risk by limiting the recoverable damages. Limitation of liability clauses limit damages to a predetermined dollar amount. Historically, these clauses have generally been upheld, particularly when the contracting parties are both sophisticated entities. Courts typically uphold limitations of liability provisions if they are conspicuous and there is nothing otherwise unconscionable about the contract. Note, however, that some state deceptive trade practice statutes contain an explicit no waiver provision that may limit the effectiveness of limitations of liability provisions in transactions involving a consumer.

Each of the provisions described above addresses an important issue that could ultimately impact the outcome of your clients case. Nevertheless, this list should not be construed as an exhaustive enumeration of contractual provisions to be included in any type of contract you may need to draft. Instead, the list above should provide a useful reminder of common, important contractual provisions that should be considered for inclusion in most contracts provisions that may be overlooked when you are focusing on the minutiae of negotiating the specifics of the particular contract at hand.

Bill Gardner is an associate business trial lawyer with Milby, PLLC in Dallas, Texas. Bill represents a variety of businesses, corporations, and entrepreneurs in litigation and corporate matters throughout the United States. Bills practice focuses business, commercial, and construction litigation, as well as the defense of professional liability claims against engineers, architects, accountants, and other professionals.

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