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There are numerous agreements that businesses require in their day to day operations. The Business Law team at Prouse, Dash & Crouch has assisted our clients in developing both general agreements for day-to-day use with customers as well as third parties such as general consulting agreements, licensing agreements, distribution agreements, manufacturing agreements, co-operation agreements, letters of credit, loan agreements, and security agreements. Although the foregoing agreements address different contractual relationships, they have many similar features. There are many basic terms that must be considered carefully and in detail when negotiating your agreements. The most common are: term, consideration, obligations, default, termination, and restrictive covenants.
In negotiating any agreement, it is important to determine the length of the relationship before the parties either renegotiate or renew a contract. Over time, business conditions change. Choosing an appropriate term will require a delicate balance between the desire to retain a service, relationship, or supply chain with some certainty as to cost and quality, while providing enough flexibility to alter terms that may become onerous or undesirable in the future. The length of term chosen may also be affected greatly by the termination provisions that will be discussed below.
This is often the most important clause in all agreements. The consideration clause sets out what is being paid in exchange for a service or a product. Consideration provisions may be simple, as in the case where there is a onetime supply of goods at a fixed price and a fixed due date for payment and delivery. However, this clause can become complicated when a contract provides for a long term provision of services or products. It is important to set out when consideration is earned and payable, when payment is due, and in what circumstances the amount payable for a product or service may change during the term of the agreement.
Many of our clients review agreements and feel that the obligations of the parties under an agreement will be agreed upon at a later date if they have not been definitively set out in their agreements. This is far from the case. It is important to set out the parties’ understanding as to what is expected of each party under an agreement from the outset. For example, if a licensed distributor requires promotional material from its licensor, the agreement should spell out the obligations of the licensor with some clarity in order to avoid an argument from the distributor that its performance under a contract was hampered due to a failure on the part of its licensor to deliver these promotional materials. If the obligation was clearly defined such an argument could not be put forward. Accordingly, it is advisable that careful and detailed consideration be given to setting out the obligations of the parties to an agreement.
The default provisions of an agreement are almost always viewed in lockstep with the termination provisions as default often leads to termination. However, termination may not always be the most desirable route. The default provisions should be used to define in what circumstances a breach might occur and provide remedies in addition to or instead of termination. In some instances, a party may wish to obtain the right to prevent or enjoin the other party from a course of conduct due to the fact that money could not adequately compensate it for a continued breach of an obligation. It is crucial that parties to an agreement indentify what constitutes a breach and what remedies may flow with respect to a breach.
You must ensure that the termination clauses in any agreement that you intend to be bound by are clear, unambiguous, and suitable to your needs. If the agreement provides for the right to terminate in the event that a party fails to pay an amount that is due, consider whether or not that party should be given notice or whether the termination should be immediate. You might also wish to consider whether the party should be given an opportunity to remedy the default. If a default notice is required, ensure that the notice period is clear and is suitable for the default in question. Finally, ensure that the termination reflects your needs. If you require that the other party be locked in to a lengthy term, then ensure that there are no frivolous or “easy outs” set out in the agreement. If you require flexibility and do not want to be locked into an agreement for a lengthy period of time, ensure that the agreement may be terminated either immediately upon notice or upon reasonable notice to the other party.
Restrictive covenants are promises from one party that they will commit or refrain from committing an act as the case may be. Non-competition, non-solicitation, and non-disclosure covenants are the most notable restrictive covenants. In many business agreements, parties can become privy to one another’s customer lists, price lists, supplier lists and other sensitive or proprietary information that could be used to gain a business advantage over the other. You must consider whether such agreements are necessary to protect your proprietary information or your competitive advantage. Non-competition covenants, it should be noted, can be very difficult to enforce if they are not well conceived. The non-competition covenant is comprised of a jurisdictional and temporal restriction that must be commensurate with the amount being paid for such a covenant. Many agreements we see do not attribute any of the value to the non-competition covenant and as such those covenants are unlikely to be enforced. The issues that arise in the negotiation and settlement of even the simplest agreements may give rise to complex legal issues. The foregoing represents a very high level discussion of business agreements and the mechanics of typical business agreements. The information provided is not applicable to all circumstances and is not intended to be construed as legal advice. For a detailed discussion and advice specific to your needs, please contact a member of the Business Law team.