1. Order of Preference Clauses
Many times a contract will reference another contract within its terms and conditions. Examples include Service Agreements which can also include signed Statements of Work, signed Purchase Orders and other documents containing supplemental terms and conditions to a Service Agreement. When reviewing a contract that mentions, includes or incorporates the terms of another contract, the ‘order of preference’ clause in the contract will instruct the parties about which contract, and what specific contract terms, have priority in relation to each other. This clause is especially important to review when there is a dispute or disagreement between the parties and a question arises regarding the order in which several contracts, or certain specific contract terms, should be applied.
2. Governing Law
The ‘governing law’ clause instructs the parties about what laws govern the terms and conditions of a contract. Although the laws of the jurisdiction where the contract is performed can serve as the governing law, the parties are free to choose the laws of a particular state or country to govern their contractual relationship. For example, in international contracts it is typical for the laws of the State of New York to be chosen by the parties as the governing law of the contract even though the contract will be performed in another state or country other than New York. The choice of New York laws to govern the contract gives the parties confidence about what laws would be implemented in the event of a dispute between the contracting parties. However, this choice could also lead to significant unknown cost and expense if the parties are unfamiliar with New York laws and have no specific business in New York. For this reason it is important to review carefully the choice of the governing law of the contract prior to entering into any contractual relationship.
3. Subcontracting Provisions
It is common for a business to use subcontractors rather than employees to perform all or some portion of a contract. Before hiring a subcontractor, it is important to check the relevant contract to determine if there is a prohibition against subcontracting contained in the contract. Many contracts prohibit the use of subcontractors without the prior written consent and approval of all of the other parties to the contract. These clauses can sometimes give the non-subcontracting parties sole, subjective discretion to approve or disapprove of a particular subcontractor.
4. Non-Violation Clauses
Most contracts contain language requiring the parties to affirm and agree they each have not violated the terms and conditions of any contracts with unrelated third parties by entering into the current contract. Therefore, it is important to check carefully whether the contract being reviewed conflicts with the terms and conditions of any other contracts of the business. Due to the many different types of contracts entered into by a business there is a good chance that some of the terms and conditions of the different contracts will conflict with each other. If there are conflicts with previously signed agreements, then these conflicts may have already unintentionally caused a breach of the contract at hand, as well as the previously signed contracts, without any knowledge of such a breach occurring. In certain situations, the existence of a previous, continuing, non-remedied breach could make those specific contracts difficult or impossible to enforce in the future.
The allocation of risk between the parties is an essential function of any contract. By entering into a written contract the parties are generally attempting to allocate the risks, costs, expenses and uncertainties of a business relationship in the form of a written agreement between the parties. Many times these risks are unforeseen or unknown on the date the contract is formed. An indemnification clause is one method parties to a contract use to allocate unforeseen risk between the parties. An indemnification clause requires a party to pay for the costs, expenses and legal fees of the other party to the contract in the event of a legal claim filed against the other party which was caused by the indemnifying party. These clauses can require a party to contract to expend a considerable amount of funds, costs and expenses in defense of a third party legal claim. They should be reviewed carefully any time a contract is being reviewed to ensure the indemnification requirements are thoroughly understood by the parties.