Contract Review – An Opportunity To Avoid Those Gotcha Moments – Contracts and Commercial Law

Why is a Periodic Contract Review Important?

Business relationships evolve. Has your company…

• Expanded its business relationship with a counterparty but
  continued to use the same negotiated contract from that first
  initial project?




• Completed a sale transaction, taking on contracts that were
  already in place with the acquired target company?




• Undergone a restructuring of the corporate organization, adding
  or combining affiliates?

All of the above situations present an opportunity to analyze
your current contract terms, updating the contract parties and
notice provisions as well as ensuring that the master set of terms
matches the risk profiles for the services or goods being
acquired.

Courts generally will enforce contract terms as written. As the
Texas Supreme Court recently pointed out, “we do not protect
parties ‘from the consequences of their own oversights and
failures in nonobservance of obligations assumed.”
James Construction Group, LLC v. Westlake Chemical
Corporation, —S.W.3d— 65 Tex. Sup. Ct. J. 1096 (Tex. 2022)
(citing Dorroh-Kelley Mercantile Co. v. Orient Ins. Co.,
135 S.W. 1165, 1167 (Tex. 1911). Texas courts will “regularly
enforce unambiguous contract language agreed to by sophisticated
parties in arms-length transactions.” Id. (citing
Chalker Energy Partners III, LLC v. Le Norman Operating
LLC, 595 S.W.3d. 668, 672-673 (Tex. 2020).

Taking the time to review certain legal provisions and
identifying areas for improvement (or even update outdated contact
information) may lessen the possibility of missed opportunities and
deadlines and other “gotchas” if a dispute arises in the
future.

Contract provisions that may warrant further review are:

1. Who are the Contract Parties to the
Contract? Often times, parties may contract at the parent
entity level only. While this may work for a master
agreement,¹ further review may be warranted if the
contract does not include affiliate language or has placed
obligations on a parent entity that is not the counterparty for
most of your operational contracts.

2. Where are your Contract Notices Going? Have
you looked at your notice provisions lately? In addition to
today’s increasing use of email and text messaging, often
notice provisions still include fax numbers as a notice option. In
addition, notice provisions likely list named individuals and their
email addresses for notices. As the past few years has reminded us,
personnel do change jobs, even if such individual stays with the
company. If notices are to be sent to named individuals or specific
email addresses, failure to update this provision could lead to
notices being delayed (or circulating within the company’s mail
system). As notices often trigger unforgiving deadlines within the
contract, including, but not limited to cure opportunities, having
the most up-to-date notice information is critical for a
company.

Practice Pointers:

• Replace the use of facsimile and fax numbers with the notice
  options your company uses




• Direct notices to the head of a department or by job title




• If an email address is used, make sure that the email address
  is monitored or include a second notice party under the contract,
  such as the legal department within the company

3. Does the Form of Agreement Work for this Scope of
Work?

Is the intent to have a master contract in place to set out the
agreed terms and conditions for a specific set of work scopes?
Would a separate agreement be better on a project-by-project basis?
Questions to consider are:

a. Will there be Work Orders?² If
there is a master agreement, does it obligate any party to perform?
If work orders are to be subsequently entered into by the parties,
does the work order stand on its own as a separate contract? Does
the work order refer to the correct master agreement?

b. Are Oral Orders Acceptable? Does the
contract allow for oral orders without written confirmation? Are
there processes in place to document oral orders?

c. Which Contract Prevails? Does the master
agreement control over any subsequent work order? Are changes
limited to certain commercial 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 lead to conflicting provisions. Consider whether the contract
should be amended and restated, capturing the agreed terms.

e. What About Those Definitions? Are there any
undefined terms? The risk of undefined terms is that a court may
fill in the gap on the undefined term with something not considered
at the time of contract formation by either party. Do any of the
defined terms refer to or incorporate applicable law? While this
may be the only way to obtain an agreement, understanding that a
reference to applicable law could cause unintended consequences and
re-allocate the risk allocation agreed to during contract
negotiations and formation.

4. Do the Indemnity Provisions Match the Risk Profile
for this Scope of Work? Is the risk profile under the work
order the same as the risk profile under the master agreement? A
master agreement may be negotiated for a specific type of work or
services, which allows affiliates to use an already agreed set of
terms. However, as the parties expand their business relationship,
evaluating whether the risk profile of a new business venture fits
under the already agreed indemnity scheme is paramount. Economic
and insurance considerations also need to be evaluated to ensure
that the new business venture and indemnity scheme does not cause
gaps in a company’s indemnity and insurance framework.

Practice Tip: Review the indemnity and
insurance provisions to ensure that the risk profile of the works
order matches the agreed set of master terms. If not, negotiating a
separate agreement to address the specific risk profile.

Footnotes

1. See below for further issues and considerations when
using master agreements.

2. A work order also may be referred to as a
“supplement” or “service order”.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.