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The essence of most business contracts is the exchange of goods or services for money. Surprisingly, though, many contracts (even otherwise complex contracts such as technology licensing agreements) have sparse provisions dealing with payment terms, and some contracts only provide for the dollar amount to be paid. This article is the first in a two-part series discussing how companies can better protect themselves in the event they are required to either judicially enforce a contract or seek damages for the breach of contract. This article will detail certain contractual provisions that should be present in every commercial contract. The second article will discuss some procedures involved in determining whether to litigate, and actually litigating, a breach of contract claim, including some advice on how a creditor may protect itself prior to judgment. Properly Identify the Contracting Party. Frequently parties to a contract are unaware of the form of entity with whom they have been conducting business. It is very important for the contract to provide for the precise name of a party, and whether the party is an individual, corporation, partnership, LLC, LLP, or some other form of entity. Obviously, in the event of breach, the correct party must be sued. Joe Smith should not be sued if the services were rendered by Smith and Associates, Inc. Also, depending on the form of the breaching party, the practical options available to a creditor differ widely. For example, when the breaching party (debtor) is a corporation that is in bankruptcy or in the process of liquidating, there may be no benefit of bringing suit even if the amount owing is undisputed. Acceleration Clause. If the consideration is paid in installments, it is important for a contract to provide that the entire debt becomes immediately due and payable in full upon the failure to pay one installment. If a creditor is unable to accelerate future installments upon default, it could find itself in the awkward and more expense position of having to file numerous suits over many months or years to enforce rights under a single contract. Choice of Law/Venue. The choice of law provision determines which state's law controls the interpretation and enforceability of a contract. In some transactions, it may be advisable for the attorney to research whether a different state (presumably with some connection to the transaction) has more favorable laws. However, regardless of the state designated, it is important to always clarify what state's law will control. Subject to the limitations on consumer debt, it is also important to have a contract specify where any litigation or arbitration proceeding can be filed. In practice, many lawsuits are not brought merely because of the expense of filing in the other party's jurisdiction. U.S. Dollars. If one or both parties possibly have international operations, the contract should specify that all payments are to made in "U.S. Dollars." This provision completely eliminates any possible currency exchange issues. As an aside, not many people realize that all of the following jurisdictions have the dollar as its currency: Anguilla, Antigua and Barbuda, Australia, Bahamas, Barbados, Belize, Bermuda, Canada, Cayman Islands, Dominica, Fiji, Grenada, Guyana, Hong Kong, Jamaica, Liberia, Montserrat, Namibia, New Zealand, Singapore, Solomon Island, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Taiwan, Trinidad and Tobago, and Zimbabwe. Insolvency/Bankruptcy Clause. There is a common provision in many contracts that a party's insolvency or the filing or bankruptcy is deemed a contractual default. The portion of the provision dealing with insolvency is enforceable, and may provide a legitimate basis to terminate a contract. However, the bankruptcy portion of the provision is generally not enforceable. It is considered against public policy to contractually provide that someone waive his/her federal right to file bankruptcy.
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