Monthly Archives: May 2009

The Most Useful Contract Provision? (Technology Law Letter #6)

In this Newsletter

  • The Most Useful Contract Provision?
  • Launch of Technology Contracts Glossary

The Most Useful Contract Provision?

In my view, the most useful contract provision is the “term”
of the contract, in other words, the time period that the contract is
legally in force before it expires.

Why?

Because a very short-term contract (such as month-to-month) can
eliminate many issues, shorten negotiations and even reduce legal
fees.  If the parties don’t like what’s happening under the contract,
they can let it expire.

On the other hand, a lengthy contract (five years or more) can
become like a ball and chain, even if it was very reasonable when it
was signed.  This is because the world changes, and no one can predict
the future.  Given enough time and money, lawyers can negotiate every
possible contingency and edge-case you can imagine, and give you a
contract the size of the Manhattan telephone directory.  You see this
for example, in information technology outsourcing agreements, which
often last for eight years or more.

It is very easy to overlook this simple and commonplace clause.   And yet this clause can have a profound impact on your deal.

You probably could accept very onerous and heavy-handed deal
terms… if they last for only one day.  On the other hand, even the
most simple contract terms can become an unbearable burden…  if they
run for 20 years.

If you want to reduce the time and expense of negotiating your
deals, there is a simple fix.  Make your deals on a month-to-month
basis.  If either party objects to the deal in the future, they can
exit, clean and simple.

If you want a deal to look longer, for “optical” purposes only, you
can sign up to a fixed term (such as two years or five years), but
allow either party to terminate “for convenience” on 30 days notice.
Termination for convenience is often written as “termination for any
reason or no reason at all.”

It will look like a longer deal, but in effect it really is a
month-to-month deal.  Watch out, though, for contracts that give this
right only to one party, not both.  The contract would then be in
essence an option contract, which only one party could exit.

I have seen month-to-month agreements and termination for
convenience clauses eliminate many unnecessary negotiations and
roadblocks to getting a deal done.

There is less to fight over if either party can leave at will.

This strategy won’t work for every contract relationship, however.
First, accountants may require an actual binding long term agreement
for accounting and financial purposes. Second, this strategy is less
effective when one of the parties has a large fixed investment to
protect.  Large outsourcing agreements raise this issue. The outsourcer
needs a long-term contract to recoup its investment in setting up the
systems and infrastructure to perform the services.  Similarly, lenders
and investors may require a true long-term contract to act as
collateral for a long-term loan or investment.

Can you imagine that a company would use the term of a contract as a
competitive advantage? That’s exactly the approach of America’s Best
Value Inn, a new hotel chain, according to The New York Times (http://tinyurl.com/5zgykh).
Most hotel chains, such as Wyndham Hotels, require franchisees to sign
up to contracts of 15 to 20 years.  By contrast, America’s Best Value
offers franchise agreements that are renewable each year.  Many
franchisees like this flexibility.

A short contract term isn’t a cure-all, of course, even for hotel
franchisees.  One lawyer mentioned in the article, who represents
franchisees, says his clients prefer long-term contracts, to protect
the franchisee from losing its franchise if it doesn’t pay for
expensive upgrades to its facilities every few years.

If your contract needs to protect a large, fixed investment by you
or the other party, then a short contract term probably isn’t the
answer.  In the future, I’ll discuss how to protect yourself in that
situation.

Launch of Technology Contracts Glossary

I recently created a glossary of terms used in technology transactions.  You can read it at http://www.BoadweeLaw.com/glossary.

This is a first release, so it needs more work.  The navigation is
primitive, but you can use the search box on the web pages to look for
a particular word.

Unlike many online glossaries and dictionaries, this is not intended
to be a dry listing of words and terse, cryptic definitions.  For many
terms I try to explain why the word is used or important.  For this
reason, some definitions are not as precise as some lawyers would
prefer, but they have plenty of alternatives to find that information.

Anyway, I hope it is helpful to you.  As always, I would appreciate receiving your comments and corrections.

All the best,

-  Harry

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Harry Boadwee’s Technology Law Letter is published by the Boadwee
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