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Contracts & Warranties

February 15, 2011

The terms included (or not included) in a contract can be determinative when litigation arises. Because of this, it is important for both businesses and individuals to be sure that any contract they enter into adequately protects their interests. Outlined below are several important contract terms that are typically overlooked as “boilerplate” language, but are nonetheless important to the rights of those who are party to the contract.

1. “Merger and Integration Clause”

Purpose: To prevent the parties to a contract from later claiming that the contract does not reflect their entire understanding, that their understanding was changed by subsequent oral agreement, or is not consistent with prior agreements.

Example: This Agreement (together with the Schedules and Exhibits hereto) supersedes any other agreement, whether written or oral, that may have been made or entered into by the Parties regarding the matters contemplated hereby. This Agreement (together with the Schedules and Exhibits hereto) constitutes the entire agreement by and among the parties and there are no agreements or commitments except as expressly set forth herein. This Agreement may only be amended by a written document duly executed by all parties.

Before entering into a contract containing this type of language make sure that all promises and agreements included in the written contract accurately reflect those agreements and promises bargained for; it may otherwise be impossible to enforce any unwritten promises.

2. “Choice of Law and Forum Selection Clause”

Purpose: To ensure that the laws of a particular state will govern any dispute arising under the contract, and to ensure that litigation will occur within a specific county and court system.

Example: This Agreement shall be deemed to have been made in the State of Minnesota and shall be governed by, construed and interpreted in accordance with the laws of the State of Minnesota. With respect to any dispute, controversy or claim arising out of or relating to this Agreement or the relationship between the parties, the Company and Distributor agree and consent to jurisdiction of and exclusive venue in the United States District Court, District of Minnesota, Fourth Division or in the Minnesota State Court, Hennepin County, Fourth Judicial District.

Note: This language is not always enforceable, particularly in relation to contracts and warranties for consumer products.

3. “Indemnification Clause”

Purpose: To require that one party indemnify the other in the event that certain expenses are incurred.

Example: The subcontractor agrees to indemnify and hold harmless the contractor against loss or threatened loss or expense by reason of the liability or potential liability of the contractor for or arising out of any claims for damages.

Be careful in the use of this type of clause, it may significantly increase your exposure if an unexpected event occurs or a contract is breached.

4. “Arbitration Clause”

Purpose: To establish that any disagreements arising under the contract shall be resolved through arbitration proceedings rather than through litigation before a trial court. Arbitration proceedings are generally less costly and may lead to a quicker resolution. Additionally, an arbitration clause can be extended to require that the unsuccessful party pay the prevailing party’s administrative costs and attorney fees.

Example: No civil action concerning any dispute arising under this Agreement shall be instituted before any court and all such disputes shall be submitted to final and binding arbitration under the auspices of the American Arbitration Association, _____________, Minnesota. Such arbitration shall be conducted in accordance with the rules of such association before a single arbitrator. All costs and expenses of the arbitration, including actual attorney fees, shall be allocated among the parties according to the arbitrator’s discretion. The arbitrator’s award resulting from such arbitration may be confirmed and entered as a final judgment in any court of competent jurisdiction and enforced accordingly. Further, the parties agree that proceeding to arbitration and obtaining an award shall be a condition precedent to the bringing or maintaining of any action in any court with respect to any dispute arising under this Agreement, except for the institution of a civil action to maintain the status quo during the pendency of any arbitration proceeding.

5. “Attorneys’ Fee Clause”

Purpose: To require that, in the event of litigation, the non-prevailing party reimburse the prevailing party for any attorney fees incurred.

Example: In the event of litigation relating to the subject matter of this Agreement, the non-prevailing party shall reimburse the prevailing party for all reasonable attorney fees and costs incurred by the prevailing party.

Effective Warranties. Well-drafted warranties can protect your business by carefully defining your commitments and specifying the remedies available when your products or services do not perform as promised.

1. Tailor express warranties. The sales/service contracts and license/distribution agreements should expressly state any warranties given, and the duration of the warranty (e.g., 30-90 days after installation or acceptance). Review all sales literature and advertisements to ensure that you are not making promises that you cannot keep, or that are not wise to make. Courts will typically hold companies to their express written promises, despite any general disclaimer in their sales contracts.

2. Disclaim all other warranties. The sales or service contracts should disclaim (i) express warranties, except those stated in the document and (ii) any implied warranties, including warranties of merchantability, and of fitness for a particular purpose. Disclaimer language should be clear andCONSPICUOUS.

3. Exclusive Remedies. To avoid being subject to broad remedial and damage claims, your contracts should limit recovery to reasonable “exclusive” remedies if any warranty is breached. Typically such exclusive remedies are limited to replacement or repair of a product, or are limited to the cost of the product or service.

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