Contractually preparing for business disruptions

Features - Contracting

Avoid potential risks or ambiguity created by “form” clauses in contracts with these considerations.

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© Andrey Popov / stock.adobe.com

One way or another, the COVID-19 pandemic has affected everyone. While the recycling industry continues to operate, most companies have experienced disruptions in business relationships—whether in product, supply chains, employee retention, contracts, real estate, insurance or as part of their prospective deals.

While it may be too late to go back and adjust the terms of contracts entered into prepandemic, now is as good a time as any to take a fresh look at how you review and negotiate contracts. In the rush of everyday business, but especially in these uncharted times, it is important not to overlook the potential risks being accepted or the ambiguity created by seemingly innocuous and “form” clauses in your contracts.

Clarity versus ambiguity

Before evaluating any contract, it can be valuable to understand whether and to what extent you could benefit or be harmed by the clarity or ambiguity of the contract’s terms. Each contractual arrangement comes with its own considerations, risks, upsides, expenses and obligations. In one contract, you could benefit from ambiguous, broadly worded terms that allow flexibility but that come with known or unknown risks. In another contract, you could benefit from clear, specifically worded terms that leave minimal room for flexibility and come with a completely different set of known or unknown risks. Understanding and appreciating where and when clarity and ambiguity benefit you most is an important starting point to establishing a beneficial contract.

Common elements

Next, it is important to appreciate the common elements of the contract and how these elements will affect the rest of the contract. From a business perspective, it is typical to focus on payment considerations (i.e., how much, by when and by whom), delivery considerations (i.e., when the goods and/or services are to be delivered) and failure of performance considerations (i.e., what happens if the goods and/or services are not delivered on time and/or are not up to a specified standard). In addition, it also is important to understand exactly which parties are being bound by the terms of the contract (e.g., affiliates, successors, officers), as well as how disputes will be resolved (e.g., arbitration, mediation, timelines).

Select terms

The following are a few select terms found in most contracts that are worth a thorough review and analysis.

Anti-assignment clauses. An anti-assignment clause prevents one or both parties to a contract from assigning all or part of a contract to a third party without the consent of the nonassigning party. Certain levels of consent from the non- assignment party may be required in writing, for example, and must be reasonably given. If the proper consent is not obtained, then an assignment could be void, depending on the terms of the contract and the controlling law. If an agreement does not contain an anti-assignment provision, a contract is generally assignable without the consent of the nonassigning party.

In thinking about how assignment of a contract could affect you, consider whether you would want an unknown third party performing those tasks. Likewise, do you anticipate wanting the flexibility to engage a third party to help you perform certain obligations? Even if you do not, in some circumstances the sale of your business or change in control of your business may be deemed an assignment.

Anti-assignment clauses often are easy to find in a contract; however, sometimes they are thrown in at the end of other sections or in the miscellaneous sections at the end of the contract. A careful review of the entire contract is warranted.

Indemnification clauses. Indemnification clauses are primarily meant to protect the indemnified party against losses from third-party claims related to the contract. Sometimes referred to as “hold harmless” clauses, indemnification clauses are used to shift potential costs from one party to the other. Indemnification clauses can be mutual or one-sided, burdening only one party with the obligation to compensate the other for losses.

The scope of these clauses can be very narrow (certain claims and only litigation) or broader (all claims by third parties related to the contract and upon notice). In general, parties to a contract seek to limit their obligations to their own mistakes or misconduct. This often is done using terms such as “to the extent arising out of” or “in any way arising out of or related to.” Another approach to limiting exposure could be to place a cap on the total amount potentially owed to the indemnified party (e.g., the value of the contract).

When signing a contract in which you are agreeing to indemnify the other party, it could be worthwhile to check with your liability insurance carrier to confirm you are covered before signing—it is common for a policy not to cover such exposure. Also, be aware of the state of the law in the applicable jurisdiction for the contract as to the legality and enforceability of indemnification clauses. For example, the law in some states prohibits indemnification clauses in construction contracts for the contractor’s negligence.

Forum-selection clauses. Forum-selection clauses identify where a dispute under the contract will be litigated. This is different from a choice of law clause, which identifies which law will apply to such a dispute. Some parties seek to select a location that is distant and inconvenient for the other party.

Before evaluating any contract, it can be valuable to understand whether and to what extent you could benefit or be harmed by the clarity or ambiguity of the contract’s terms.

The reason for this is clear: You are less likely to initiate litigation in a distant location where you will incur increased costs and use more of your valuable time. Additionally, you likely will have to retain local counsel who does not know you and will have a steeper learning curve, adding to your expense.

If you agree to such a forum-selection clause, you typically are giving the other party the home-court advantage. In such a case, the forum-selection clause likely will serve to deter you from seeking a remedy in the event of a dispute.

On the other hand, including a forum- selection clause that is favorable to you can help ensure that you avoid wasteful delays and use of resources or litigating over collateral issues such as which court should hear a dispute.

When interpreting forum selection clauses, courts pay close attention to the wording. If too broadly worded, a court may view it as permissive and not binding. Using terms such as “shall,” “exclusive” and “any dispute” have been viewed as making the forum selection mandatory.

In addition, you might wish to consider whether to be specific as to the type of court before which a dispute under the contract will be litigated. For instance, simply stating that disputes will be handled “in” New York could be interpreted to mean either federal or state courts located in New York, whereas “courts of” New York may be viewed narrowly as only New York state courts.

Force majeure. A force majeure clause is a contract provision that relieves the parties from performing their contractual obligations when certain circumstances beyond their control arise, making performance inadvisable, commercially impracticable, illegal or impossible. Economic hardship typically is not enough to qualify as a force majeure event on its own.

Force majeure clauses generally are interpreted narrowly. Any dispute surrounding a force majeure clause will be highly fact-intensive. Proper notice pursuant to the terms of the force majeure clause also is vital to having a successful claim.

Force majeure events typically enumerated in contracts include acts of God, such as severe acts of nature or weather events, including floods, fires, earthquakes or explosions; war; acts of terrorism; acts of governmental authorities, such as expropriation, condemnation and changes in laws and regulations; and strikes and labor disputes.

Going forward, force majeure events most likely will include epidemics, pandemics, quarantines and other government restrictions on business operations and travel. If a force majeure clause does not list epidemic or pandemic as a triggering event, it is possible that business impacts from COVID-19 could be covered as an act of governmental authority in some areas, given that many governments have instituted lockdowns to prevent the spread of the coronavirus.

Careful review required

Negotiating and reviewing contracts is inherently fact-specific, based on a party’s position, risk-tolerance, experience and bargaining power. Nevertheless, it is advisable to carefully review all terms, even in so-called “form” contracts, to ensure your business is not taking on any unknown or unnecessary risks or obligations.

Jon Schaefer and Earl Phillips serve as co-leads of Robinson+Cole’s recycling practice. Together they have more than 40 years’ experience working with the scrap recycling industry and its members. They have provided counsel with respect to due diligence and transactions; facility planning and risk management; facility location and relocation; environmental, health and safety (EH&S) permitting and compliance as well as defense of EH&S enforcement matters; and all manner of dispute resolution. They can be contacted via email at jschaefer@rc.com and ephillips@rc.com, respectively.