Core Business Documents: Understanding the Legal Agreements to Protect Your Company and Keep Your Money (Part II)

By: Maks EwendtPicking up where we left off in Part I, lets dive deeper into the specific terms often found in business agreements and how they may impact your business decisions.  While the subject and consideration of your agreements may vary, the general structure of the agreements tend to follow the same pattern, making it easier to identify what is (and sometimes more importantly, what isn’t) included.  As you read through an agreement, you’ll usually find the subject of the agreement is front and center, followed by the consideration being given for the subject matter, with any additional obligations shortly thereafter, and finally the standard clauses right before the signatures.

Subject of the Agreement

Hopefully, the first few sections (maybe hiding after the definitions section) will cut to the chase and address the purpose of your agreement.  It should outline the goods being provided, services being performed, license being granted, employment role being offered, or whatever engagement is bringing the parties together.The art of these sections is to balance the specificity of the description so that it is accurate, with the details broad enough to allow for flexible execution where appropriate.  If there is any confusion or dispute about the performance of the parties during the agreement, this is the starting point to determine exactly what was expected to take place.  Using exact numbers, dates, titles, and other descriptors for material components of the agreement will help drive performance, while using softer language such as “reasonable,” “promptly,” and “industry standards” will allow for practical execution of the unknown.

Consideration

Once the subject of the agreement has been appropriately identified, it’s time to discuss the consideration that will be provided in exchange for it.  While consideration is most often money, it could be other tangible or intangible benefits including goods or services in kind, equity in a business, the sharing of ideas, or future considerations.After determining exactly what consideration will be going back to the other party, it’s important to describe the pertinent details of how it will be exchanged.  If it’s a payment, consider if it will be one-time or recurring, before or after delivery of the subject, the frequency of payments, the timing of invoices, the amount of time the party will have to pay, and what happens if a party doesn’t pay.  When equity is being exchanged, include details such as whether it’s an immediate grant of equity or an option, if there’s a vesting schedule and its details, and what happens if there are future equity events.

Additional Obligations

Now that the subject and consideration have been identified (also known as the “fun stuff”), the next group of terms can start to shift into legalese that seems more distant from the transaction (also known as the “less fun stuff”).  While arguably less fun, a lot of risk, liability, and additional  steps are established in these clauses that can have a huge impact on your business.  A few common additional obligations to be aware of are:Acceptable Use and/or Restrictions: More often than not, the subject that’s being granted in the beginning of the agreement will be immediately restricted by describing how it may be used, or specifically listing how it can’t be used.  A license to use software is followed by how you can or can’t use the program.  A non-disclosure agreement will describe the information being disclosed, followed by how you may or may not use or disclose what you’ll learn.Confidentiality: Agreements not specific to the transfer of confidential information may include their own confidentiality clause.  These confidentiality clauses can limit disclosure about the subject of the agreement, disclosure about the consideration exchanged for the subject, disclosure about what one party may learn about the other during the agreement, and even disclosure of the existence of the agreement itself.  These clauses often include remedies in case it is breached, such as injunction to prevent further disclosure while a claim for damages is filed.Warrant(ies): Warrants and warranties are conceptually similar even if practically different.  Both require that the party giving them corrects any deficiencies if they’re incomplete.  Warranties are likely what most people associate with this concept, as they are provided to cover the quality of goods and services.  If an item or service proves to be deficient during the warranty period, the provider has to “make good” to the other party subject to the terms of the warranty.  Warrants (often combined with Representations) are typically promises made by a party that they will “make good” on if it ends up being not true.  Promising that the signer has the authority to bind its organization is a common warrant/representation.Indemnification: This is one of the trickier concepts of an agreement to track without using a white board and several color markers.  A party that agrees to indemnify another party is agreeing to step in and defend that other party from any lawsuit or claim brought by a third party that is not in the agreement. For example, if a store sells a product provided by a manufacturer, and one of the store’s customers sues the store because the product is defective, the manufacturer would step in to defend the store as if the suit was brought against the manufacturer (this why color markers are helpful). As you may guess, those legal costs can add up quickly, which is why indemnification is a hotly negotiated clause.  Middle ground for indemnification clauses can be found by adding limitations, exclusions, and mutuality.Insurance: Insurance obligations can range in specificity, both in policy details and procedures for claims.  It’s important to make sure that the insurance obligations you’re agreeing to either fit within your standard business model or that you procure additional coverage.  If additional coverage is needed, it typically results in increased premiums, so keep in mind that you may be able to increase the subject of the agreement or consideration to make it worth your company’s additional expense.

Standard Clauses

The so-called standard clauses, sometimes grouped together in a “Miscellaneous” section, are only considered “standard” because they’re applicable to every agreement.  The terms within the clauses, however, can differ greatly and have a tremendous impact on the agreement.Term/Termination: Every agreement should have a defined term within which the terms of the agreement will apply.  The term can be limited, automatically renew, or renew only at the sole discretion of one of the parties.  If included in the term clause, identified obligations of the agreement can extend beyond the end of the agreement.  When considering the term, it’s important to note which party(ies) can terminate the agreement before the end of the term, and how they can do so.Governing Law/Venue/Jurisdiction: If your agreement is between parties, or involves a transaction, that spans international or state borders, then there will be questions regarding which jurisdiction’s law governs in the case of a dispute, and where that dispute should be heard. The value of these clauses is that the parties can agree to these ahead of time, saving time, money, and frustration by not arguing about them after a claim arises.Assignment: For some agreements, the party you’re agreeing with can be as important to you as the subject and consideration contemplated by the agreement.  Generally, contracts can be transferred, or “assigned,” from one party to another.  To prevent a contract from being assigned to a party that you didn’t intend to work with, assignment clauses outline if and how the agreement may be assigned. Assignment permissions can range from not at all, to requiring written consent or just notice, to even limiting permitted circumstances such as the acquisition of a party.  Assignment clauses often come into play when a company with longstanding or subscription customers has an exit event, as they may need to seek consent from, or provide notice to, their customers or business partners to transfer their agreements to the purchasing company.Waiver: It’s not uncommon for common law to require a party to file a claim if the other party has breached an agreement, or else the non-breaching party may not have the right to file a claim for a subsequent breach because the original breach was seemingly permitted.  Therefore, a waiver clause, or more accurately a non-waiver clause, usually dictates that if one or either party doesn’t file a claim for a breach, then they’re not precluded from filing for a different breach down the road.Force Majeure: Force Majeure clauses take into consideration unforeseeable situations outside of a party’s control that would impact, limit, or prevent their performance of the agreement.  This clause was a bit of an afterthought and became pretty boilerplate until 2020 when a novel virus had a huge impact on the world, including the global supply chain and travel restrictions.  Companies and lawyers alike scrambled to check their contracts to see if an international pandemic could be considered in their force majeure events that could alleviate their obligations.Entire Agreement: This clause can usually be found toward the of the agreement, but should not be an afterthought.  While the header sounds obvious, that yes, this is in fact the entire agreement, the clause also typically stipulates that any conversations, proposals, promises, etc that aren’t included in the agreement, don’t count.  To bring this article full circle, this clause is what makes the details surrounding the subject of the agreement so important.  If you sign an agreement based on information from a sales presentation, and all of those details aren’t also captured in the subject of the agreement, then you can only hold the other party accountable for what made it into the contract.Headquartered in the Research Triangle region of North Carolina, Fourscore Business Law serves entrepreneurs and businesses in the Triangle, throughout the Southeast and in Silicon Valley / San Francisco. We also represent venture capital funds and other investors who invest in companies throughout the U.S. The idea of delivering maximum impact in a simple and succinct manner is what we’re calling the Fourscore Principle. And that is what Fourscore Business Law is based on. Our clients operate in a broad range of industries including tech, IoT, consumer products, B2B services and more. Questions? Shoot us an email or give us a call at (919) 307-5356. Your first call is on us.