Starter Law School: Three Common Contractual Terms You Need to Understand

by: Clint Costa

Like any other DIY project, at-home lawyering can sometimes have “interesting” (read: disastrous) results.  But, until Wal-Mart opens a law firm or IBM’s Watson hangs a shingle; all starters will end up reviewing important contracts on their own.

Here are three common contractual terms, what they mean, and what to do with them.

“Complete Agreement” or “Merger” Clauses

Here’s a basic example:

“This Agreement constitutes the entire agreement of the parties and supersedes all prior communications, understandings and agreements relating to the subject matter hereof, whether oral or written.”

The purpose of a provision like this is to get the parties to agree that the signed contract contains all of the terms of the deal.  Remember when that sales guy was telling you that he would move heaven and earth to make sure you were happy with the service you received?  Well, guess what: if the “heaven and earth guarantee” isn’t in your contract, you can’t rely on it and you definitely can’t enforce it in court.

On the vendor side, this provision is great because it means the vendor gets your business without “moving heaven and earth” in the first place (nobody has a heavy equipment license, anyway).  Since you didn’t ask for the “heaven and earth guarantee” is in the Agreement, it won’t be upheld by a court.

Possible Recommendation: If you find one of these provisions in your contract, make sure that everything you were guaranteed or are expecting is actually in the Agreement.  Don’t leave it up to the goodwill of the vendor to fulfill non-contractual terms, because the vendor will not have any legal obligation to do so.

Governing Law, Venue and Jurisdiction

Here’s a basic example:

“This Agreement shall be interpreted and construed according to, and governed by, the laws of California, excluding any such laws that might direct the application of the laws of another jurisdiction. The federal or state courts located in Los Angeles, California shall have jurisdiction and exclusive venue to hear any dispute under this Agreement and the parties hereto irrevocably submit to the jurisdiction of such courts, waive personal service and further waive any objection to such venue on any basis including forum non conveniens.”

The purpose of this provision is to make sure that if you try to sue the other party or the other party sues you, you’ll be doing so in sunny California.  This might be terrible for you.

Consider the possibility that you get into a dispute with a large customer and it decides not to pay you.  The only way to get paid is to sue.  With this provision in place, you’ll need to file your suit in Los Angeles.  And you’ll need a California attorney.  And you and your staff will probably need to pop in and out of LA at least a few times for depositions.  Bottom line: filing a lawsuit just got more expensive and obtrusive for you and your business.

Possible Recommendation: If you are presented with a contract that is going to require you to litigate anywhere but home, make a change.

The Illusory Promise

This isn’t a particular contract clause, per se, but rather a failure of contract language that happens all the time.  Consider these two bonus provisions:

“Employer shall, in its discretion, pay an annual bonus to Employee considering Employer’s overall financial results and Employee’s productivity.”

“Employee shall accrue and earn bonus compensation (“Bonus”) each year which shall be calculated as the product of Employer’s Annual Profit multiplied by Employee’s Productivity Percentage.  Any such Bonus shall be paid to Employee on or before the 15th day of the month following the close of Employer’s fiscal year.  For purposes of this Agreement, Annual Profit shall mean Employer’s profit as calculated under GAAP for the fiscal year in question.  Productivity Percentage shall mean the number of hours logged by Employee on assigned projects divided by gross revenue earned on all such projects.”

If you were the employee in this situation, which provision would you rather have?  The second one, right (and not just because it’s longer)?  You would want the second one because it actually binds the employer to something.

Take a look at the first provision again.  Although the clause starts out with “Employer shall…” all the force of the word “shall” is removed by “in its discretion.”  In other words, the first provision doesn’t actually require the employer to pay any bonus no, matter how profitable the company is.

Possible Recommendation: Make sure that contracts actually require both parties to do something (or better yet, all of the things that have been agreed upon during negotiation).  Look for the words “shall” or “will,” and avoid “may.”  Also, be wary any time you see the word “discretion.”

Hopefully, these tips will come in handy the next time you’re doing a little DIY lawyering.

About the author Clint Costa @LawGuy60606
Clint Costa is an attorney and CPA with the Chicago law firm of Duggan Bertsch, LLC. Clint represents startups, entrepreneurs, established businesses and high net worth individuals (rich people) on all manner of official sounding legal and tax matters. Clint teaches "Law School for Entrepreneurs" through the Chicago start-up, Dabble.co and his writings can also be found on TechCocktail. Feel free to get in touch with Clint via email.

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