Do you use pre-prepared forms in your business? Almost every business does in some capacity. Digital technology has made our communications instantaneous. However, when relying on boilerplate forms to buy or sell goods, a fast paced email interaction and order fulfillment process could cast ambiguity on the enforceability of your business agreements. As such, businesses should understand the contract formation process to reduce operational risk, streamline fulfillment processes and protect the bottom line.
Breach of contract
A contract enforces a promise to perform mutually agreed upon conditions between parties. When a contract is broken or breached, in order to fully explore legal options the situation is broken down into parts. As such, the following questions are asked:
- Does a valid contract exist?
- What terms were agreed upon by the parties to the contract?
- What do the mutually accepted terms mean?
- Have one or both parties to the agreement performed or partially performed promised duties?
- When there is non-performance of a promise in a contract, what liability or remedy is available to the injured party?
Form clauses commonly found in litigation
A single written contract is not required to create a valid agreement. Typically, a price quote is exchanged between parties, followed by a purchase order, which is then confirmed and goods are shipped from the seller to buyer. The forms and conduct of the parties will create the contract, which may or may not be valid and enforceable. When the exchange of standardized forms is the basis of a proposed agreement, common terms frequently hammered out in litigation include:
- disclaimer of warranties
- limits on remedies when a term is breached by a party
- interest rates on past due invoices
- payment of legal fees incurred by a losing party when a dispute results in litigation
- choice of state law applied to interpret and control the terms of the agreement.
Becoming aware of clauses in your standardized forms that fall under these categories can help you better anticipate red flags in the forms you receive. It may also inspire innovative negotiation tactics to leverage to your benefit.
Avoid unreasonable reallocation of risk outside the offer
Contract negotiation is about allocation of risk between the parties. When relying on standardized forms, identifying terms that appear to reallocate risk in an unreasonable manner outside the original offer provides an opportunity to evaluate and optimize future business practices. As such, if you own a business in an industry that relies on purchase agreements or order forms to create contracts, it is wise to have your standardized forms along with your typical order and fulfillment processes reviewed by legal counsel experienced in business transactions.