Why is a periodic review of contracts important?
Business relationships are changing. Does your business have…
- Expanded its commercial relationship with a counterparty but continued to use the same contract negotiated since this first initial project?
- Have you concluded a sale transaction by taking over contracts already in place with the acquired target company?
- Have you undergone a restructuring of the company’s organization, by adding or merging subsidiaries?
All of the above situations provide an opportunity to analyze current contractual terms, update contracting parties and notice provisions, as well as ensure that the master set of terms matches the risk profiles of the services. or property acquired.
The courts will generally apply the terms of the contract as they are written. As the Texas Supreme Court recently pointed out, “we do not protect the parties ‘from the consequences of their own oversights and breaches in the breach of assumed obligations.’ James Construction Group, LLC v Westlake Chemical Corporation, —SW3d— 65 Tex. Sup. CT. J. 1096 (Tex. 2022) (citing Dorroh-Kelley Mercantile Co. v. Orient Ins. Co., 135 SW 1165, 1167 (Texas 1911). Texas courts will “regularly apply unambiguous contractual language agreed upon by sophisticated parties in arm’s length transactions.” ID. (citing Chalker Energy Partners III, LLC v Le Norman Operating LLC, 595 SW3d. 668, 672-673 (Tex. 2020).
Taking the time to review certain legal provisions and identify areas for improvement (or even updating outdated contact information) can reduce the possibility of missed opportunities and deadlines and other “pitfalls” if a dispute arises in the future.
Contractual provisions that may warrant further examination are:
1. Who are the contracting parties to the contract? Often the parties can contract at the level of the parent entity only. While this may work for a framework agreement,1 further review may be warranted if the contract does not include affiliation language or has imposed obligations on a parent entity that is not the counterparty for most of your operational contracts.
2. Where are your market opinions going? Have you recently reviewed your notice provisions? In addition to today’s increasing use of email and text messaging, notification provisions often include fax numbers as a notification option. Also, the notice provisions likely list appointees and their email addresses for notices. As we have been reminded in recent years, staff change jobs, even if they stay with the company. If notices are to be sent to named individuals or specific email addresses, failure to update this provision could result in notices being delayed (or circulating through the Company’s email system). As notices often trigger ruthless delays in the contract, including but not limited to healing opportunities, it is essential for a business to have the most up-to-date notice information.
- Replace the use of fax and fax numbers with the notification options your business uses
- Direct notices to the head of department or by job title
- If an email address is used, ensure that the email address is monitored or include a second party of notification as part of the contract, such as the legal department within the company
3. Does the agreement form work for this scope of work?
Is the intention to have a framework contract in place to define the agreed terms and conditions for a specific set of scopes of work? Would a separate agreement be preferable, project by project? Questions to consider are:
a. Will there be work orders?2 If there is a framework agreement, does it oblige a party to perform? If work orders are to be subsequently entered into by the parties, does the work order constitute a separate contract? Does the work order refer to the correct framework contract?
b. Are spoken commands acceptable? Does the contract allow for oral orders without written confirmation? Are there processes in place to document verbal orders?
vs. Which contract prevails? Does the master agreement control any subsequent work orders? Are the changes limited to certain business terms specifically identified in the work order?
D. How many amendments so far? How many times has the agreement been amended? Multiple amendments to a contract could result in conflicting provisions. Determine whether the contract needs to be amended and restated, by entering the agreed terms.
e. What about these definitions? Are there any undefined terms? The risk of indefinite terms is that a court may fill the gap on the indefinite term with something that was not considered at the time of the formation of the contract by either party. Does any of the defined terms refer to or incorporate applicable law? While this may be the only way to get an agreement, understand that a reference to applicable law could lead to unintended consequences and reallocate the allocation of risk agreed upon during contract negotiations and formation.
4. Do the indemnification provisions match the risk profile for this scope of work? Is the risk profile of the work order the same as the risk profile of the master contract? A framework agreement can be negotiated for a specific type of work or service, allowing affiliates to use an already agreed set of terms. However, as the parties expand their business relationship, it is critical to assess whether the risk profile of a new business venture fits within the already agreed compensation regime. Economic and insurance considerations should also be assessed to ensure that the new business venture and compensation scheme does not cause gaps in a business’s compensation and insurance framework.
Practical tip: Review the indemnification and insurance provisions to ensure that the risk profile of the work order matches all agreed terms and conditions. If not, negotiate a separate agreement to address the specific risk profile.
1 See below for other issues and considerations when using master agreements.
2 A work order can also be called a “supplement” or a “service order”.