Pitfalls in Contracting

Published March 25th, 2019 by Budd-Falen Law Offices, L.L.C.

Bethany A. Gross

The Falen Law Offices, LLC

A contract is easily created and can take many forms.  The most familiar is a formal written document, but with certain exceptions (such as a real estate contract for sale) a contract can be valid if made verbally or even if written on the back of a napkin.  Any contract is valid so long as an offer is made and accepted, both parties have the mental capacity to make a contract, the contract has a legal subject matter, and the contract is grounded on some form of mutual benefit (i.e., “consideration”).  Once a valid contract is made, however, it is not so easy to get out of.  Without appropriate contract terms, the unwary may suffer unintended consequences.  There is no limit to the different kinds of provisions that may be included in a contract.  Nevertheless, some important contract provisions include land descriptions; liability and indemnity clauses; default, termination, and waiver clauses; venue and choice of governing law clauses; attorney fees; and contract terms providing clarity.

Land Descriptions.  It is vitally important to include a detailed description of the land in any contract involving land or real estate.  Such contracts may include leases, easements, and contracts for sale.  Not only may it be required by law to include a description of the land (such as in contracts involving real estate), but it is also important to avoid confusion or unanticipated results.  Fence-lines or other property boundary markers are frequently inaccurate.  A detailed land description can help a landowner know where the true property boundaries are to prevent squatters and adverse possession claims.  For easements, describing each parcel that is to benefit from an easement may prevent the easement from being lost as to certain parcels if they are later subdivided and conveyed to someone else.  For leases, if a lease is too broad and the lessor does not specifically describe the land to be leased, the lessee may choose to use lands the lessor did not intend the lessee to use.

Liability and Indemnity Clauses.  Clauses pertaining to liability or indemnity are also very important contract terms.  Agreeing to indemnify someone is an agreement to accept liability for the other person’s actions and without a provision to limit liability can result in being liable for simple negligence.  For example, a landowner may lease his or her land to a lessee to allow the lessee to graze cattle.  If one of the lessee’s cattle escape onto a roadway and causes a car accident, the car accident victim may include the landowner in a lawsuit to recover personal injuries.  If the landowner included an indemnity clause in the lease requiring the lessee to fully indemnify the landowner, the lessee would be fully liable for the lawsuit with the car accident victim.  On the other hand, a party to a contract may agree to be liable for only his or her own knowingly willful or intentional acts.  Determining which degree of liability is appropriate will depend on the purpose of the contract and what each party is willing to accept.

Default, Termination, and Waiver Clauses.  Default and termination clauses allow parties to terminate a contract for a breach of contract or other reason.  Without a default clause, parties to a contract may have to resort to the courts to determine what should happen if a breach of contract occurs.  This can be time consuming and expensive.  Even in absence of a breach or default, a termination clause that allows the parties to terminate the contract within so many days after providing written notice may allow the parties to get out of a contract that suddenly becomes undesirable or the parties’ relationship turns sour.  In addition, a waiver clause should be included in a contract with a default clause.  Without a waiver clause, a party may not be able to terminate a contract if the party accepts some cure of a default from the other party.  For example under a contract containing a waiver clause, if one party fails to make a timely payment, the other party may accept a late payment without waiving his or her right to terminate the contract for a default regarding payments.

Venue and Choice of Governing Law.  Designating a particular venue in a contract means that disputes involving the contract will be heard by a particular court; generally in a particular county and state.  Moreover, a particular state’s law can be designated as the law governing the interpretation of a contract.  These provisions can be especially important when each party to a contract lives in different states.  If no venue or choice of governing law is designated, a court may have to determine venue and law based on which state the defendant resides in.  This can be very inconvenient and detrimental for a party who lives in the western part of the United States and who is suing a large company headquartered in Delaware.

Attorney Fees.  The general rule is that each party bears his or her own attorney fees.  Parties can deviate from that general rule by drafting a provision for attorney fees to be paid by the losing party, or by a particularly designated party.  Often, such clauses are included in a contract in an effort to discourage litigation.  However, caution should be taken by a party contracting with a much larger or more affluent party.  In this regard, a modest landowner may not want to risk having to pay a large company’s expensive attorney fees if the landowner happens to lose.

Contract Terms Providing Clarity.  Contract clarity is crucial to avoiding significant litigation.  Misused or misspelled words can result in changing the meaning of an entire contract.  It can be impossible to predict how any term in a contract will be interpreted, especially if definitions of key terms are not included in a contract.  For example, without a definition of what a “mineral” is, an oil and gas company could end up being entitled to valuable dinosaur fossils rather than the landowner.  Further, blank spaces should never be allowed to remain in a contract.  There is no guarantee that the blank space will be filled in later, and will likely lead to considerable litigation if not filled in before a dispute occurs.  This can be particularly true if a certain number or price is omitted, and the number or price changes over time or the parties have different expectations of what the number or price should be.  Generally, a court will enforce the terms of a contract without resorting to outside evidence.  However, if a contract is unclear, a court will require the parties to produce evidence of what their intentions were, which could also include the necessity of expert testimony.  If an expert’s testimony is needed, it can be expected that the party will spend a substantial amount of time and money on litigation.

Conclusion.  In the end, these are only some of the potential provisions and issues that can be encountered in a contract and it is impossible to thoroughly discuss in this article every possibility.  Every contract term raises numerous pros and cons which will vary depending on individual circumstances, and which should be discussed in detail with a qualified attorney.  Conferring with a qualified attorney before signing a contract can save thousands of dollars later down the road when unanticipated situations arise.

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