Sales agreements are everywhere. There are online agreements to click through, pre-filled boilerplate forms to sign, and custom agreements put together specifically for the sale at hand. Some purchases are made according to “adhesion contracts”—either the buyer signs the form contract offered by the seller, or she doesn’t make the purchase. Some agreements are still made on a handshake basis, despite the pitfalls accompanying an oral contract. In any agreement, both parties—buyer and seller—should enter the relationship with their eyes wide open. Signing a contract without reading it can lead to major consequences down the road.
The number one key with any contract is to make sure you READ IT and UNDERSTAND IT before SIGNING IT. Some lawyers like to use complicated legalese, which clogs a contract up with filler words like hereinafter and wherefore and other unnecessary verbiage. Clear, concise, effective, understandable contracts are harder to write, but farmers and businesses should demand a contract they can understand.
This isn’t a post on exactly what every contract should include. Different purchases call for varied protections and terms. This post explains some of the most common contract terms, and provides tips on what those provisions could mean down the road. Of course, usually when we enter the contract, we don’t believe anything will go wrong and we are excited for the business opportunity with the other party. It is still important to review all contract terms before adding your John Hancock.
The following clauses are included in many sales contracts:
- Attorneys’ Fees. Boilerplate contracts often include language awarding attorneys’ fees if litigation is brought to resolve disagreements under the agreement. Check to see if the prevailing party is always awarded fees—or if it is just the party who drafted the contract. The award of attorneys’ fees can be a big stick during negotiations if things go awry.
- Venue. Many contracts include a clause requiring any suit regarding the contract to be brought in a certain jurisdiction (Marion County, Indiana state courts; Northern Illinois federal courts; etc). Make sure you are ok with that court choice. Consider whether one party could have a motive for wanting the litigation in a certain court.
- Choice of Law. When I draft contracts, I include a choice of law provision that indicates what law applies to the agreement and any litigation related to it. This may be the state where the good(s) are located, where one company’s home base is, or a state with friendly regulations.
- Alternative Dispute Resolution. Click through contracts usually include an agreement that both parties consent to arbitration or mediation in the case of a dispute. Arbitration and mediation are useful tools for resolving disagreements, but you should be comfortable with the choice and aware of the limitations accompanying that choice.
- Timelines. This one seems intuitive, but I can’t tell you how many contracts I’ve seen that don’t spell out when each party will perform its obligations. Save yourself a headache later and include a timeline.
- Remedies. I mentioned attorneys’ fees above, but what other remedies are included in the contract in case of breach? Injunctive relief? Money damages? Liquidated damages? Liquidated damages clauses that look more like a penalty won’t be upheld under certain state law (Indiana, for one).
- Breach. Again, this seems obvious, but it is important to spell out what will be considered a breach and what will not. It may be worth it to differentiate between “material” breaches and other lesser types of breach. If there is a certain standard the product should meet, what does delivering a product that falls below that standard mean? Define breach.
- Modifications. Can changes be made to the contract? Do they need to be in writing? Signed by both parties? Who has authority to make changes? These things should be taken care of on the front end rather than waiting until the time a change is needed.
- Delivery. If the sales agreement is for goods, how will the goods be delivered? The time when title transfers to the buyer should be specified. Who will pay for shipping? Depending on the product involved, will the shipping be insured? What happens if the product is damaged in transit?
- Security Interest. Some contracts create a security interest or purchase money security interest (PMSI) in favor of the seller. The Uniform Commercial Code provides the general rules for security interests. The party giving the interest in the collateral must agree to give that interest, usually in the form of a security agreement. This can be a part of the sales contract. Both parties to the agreement should be aware of the rights and obligations a security interest creates and should agree on what property is covered by the security interest, if any.
These tips are not a silver bullet—each contract should be analyzed on a case by case basis. The takeaway is that businesses and farmers should save themselves a headache and read before they sign. This post should not be construed as legal advice. If you have questions about a contract, call an attorney.