Reading the fine print in a business contract is probably not your idea of a good time. You have a busy practice and negotiating contracts is clearly not why you became a veterinarian or hospital administrator. That said, every business owner or manager should have a firm understanding of which contract provisions require careful review. This is important because contracts create significant obligations and liabilities.
While every contract is different, the following five provisions are common in business agreements. I will explain the provisions and what you need to avoid.
Indemnification
Example: You agree to indemnify, defend and hold harmless ABC Corp. from and against any loss, cost, liability or damage (including professional fees) arising out of your breach of the agreement or your negligence or willful misconduct.
WHAT DOES IT MEAN?
An indemnification provision is a promise by the indemnifying party to be responsible for certain losses of the indemnified party. These losses typically are caused by the indemnifying party’s agreement breach and include losses based on claims raised by a third party against the indemnified party. For example, your cleaning service might require you to sign an indemnification provision stating that if you create a hazardous situation in your hospital that injures one of its workers, then you will be responsible for the damages and injuries incurred by the employee.
PITFALLS AND TIPS
Indemnification clauses are important and are often heavily negotiated and litigated. They are used to address high-risk and high-cost occurrences. If you are indemnifying another party, be sure you are indemnifying only for your own negligence or willful misconduct. Indemnification provisions sometimes are overbroad, requiring the indemnification of acts by any third party concerning the matter. While protecting the other party from your own wrongdoing might be fair and equitable, it is typically not standard for you to have to protect the other party from damages you do not cause through your breach or other wrongful actions.
Confidentiality
Example: You agree to keep confidential the terms and conditions of this agreement and any information provided to you or your employees, agents or contractors. You shall not (a) disclose to any third party any terms or conditions of this agreement or any other agreement-related document or (b) provide to any third party an original or a copy of this agreement.
WHAT DOES IT MEAN?
A confidentiality provision requires you to not disclose agreement terms or sometimes the existence of the agreement to any third party. This can be important to suppliers that negotiate different terms with customers. The supplier might require that you keep your agreement confidential to protect the supplier’s bargaining power at other practices.
PITFALLS AND TIPS
A confidentiality provision is problematic for at least three reasons:
- You might forget that an agreement has a confidentiality provision.
- Informing everyone in your practice who might breach the provision that they must not do so can be difficult.
- If you consider the sale or merger of your practice, you likely will be asked to disclose all your business contracts to the other party.
You might be liable if the other party to the confidentiality provision incurs damages as a result of your disclosure. Additionally, if telling prospective clients and customers that you are in a business relationship with the other party is important to your business strategy, then you need to be allowed to do so under the terms of the contract.
Limitations on Damages
Example: You agree that ABC Corp.’s damages for any breach of this agreement shall be limited to the amounts you pay for the services provided by ABC Corp.
WHAT DOES IT MEAN?
A damage limitation clause caps the amount you can claim if the other party breaches the agreement. As a result, using the example above, if you’ve only paid $30,000 for products or services under the agreement, then that is the maximum you may be entitled to, even if the other party does something that causes you to incur $100,000 in damages.
PITFALLS AND TIPS
Damage limitation clauses are typically negotiable. Most third parties, if pushed, will agree to be solely responsible for at least their own negligence. To negotiate a damage limitation provision, either ask that it be removed altogether or add language stating that the limitation will not apply to the negligence or willful acts of the other party.
Waiver of Warranties
Example: ABC Corp. supplies all information, materials, work product and any other deliverables under this agreement without any warranty, representation or undertaking whatsoever, express or implied, including but not limited to, any warranty regarding the efficiency, quality, performance, condition, workmanship, merchantability or fitness for a particular purpose.
WHAT DOES IT MEAN?
Parties include a waiver of warranties to try to limit their liability if the product or service they provide does not work as intended or causes damages. Not all waivers of warranties are fully enforceable under applicable law, but if you want to hold the other party to its promises about how a service or product will function, a waiver of warranties is problematic.
PITFALLS AND TIPS
The best option is to negotiate out of the agreement a waiver of warranties. If not possible, consider variations of the warranty to make it somewhat limited without entirely absolving the other party. For example, you can ask the other party to warrant that the product or service will comply with applicable law, will be delivered in accordance with the provisions and specifications of the contract, and will operate as intended for a certain period of time.
Venue Choice for Disputes and Litigation
Example: You irrevocably agree that the courts located in your county and state shall have the sole and exclusive jurisdiction over any dispute arising under, relating to or in connection with the agreement.
WHAT DOES IT MEAN?
A forum selection clause is intended to make litigation more convenient and less expensive for one of the parties by creating a mandatory obligation to litigate disputes in a certain county and state. The clause is not uniformly enforced in all states, but when it is, it can provide a key advantage to the party that does not have to travel to or engage lawyers in a faraway state.
PITFALLS AND TIPS
Litigating in another state can be expensive, particularly if the forum includes a county with a large city. If you have strong bargaining power when negotiating the contract, asking for a forum selection clause in your backyard is preferable. As a middle ground, eliminating the provision altogether or choosing a neutral location is a good option.
Last Advice
Savvy practice owners and managers know when it is unwise to review a contract without getting legal advice. My most important tip for you is to consider the big picture, thinking about the magnitude and potential for liability in any business contract.
If you are even remotely thinking about selling your practice, a potential buyer will scour the provisions of your contracts and weigh ongoing risks and liabilities. While legal advice is not free, it can be the most important investment you make before you sign on the dotted line.