Business to Business (B2B) Contracts - Important Legal Issues Part 1
Business and commercial contracts are a useful tool for ensuring that promises made are promises kept. It is important for every business not to neglect the details in the body of a contract because they are caught up in the big picture of a deal. Every contract has its own particularities and issues that deserve special attention while drafting in order to avoid potential pitfalls. This blog highlights important drafting issues in business to business (B2B) contracts in order to help you allocate risk and avoid problems.
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Important Legal Issues for B2B Contracts, Part 1:
1) Understand the Business
At the beginning of the drafting process, it is important for a business to work closely with its counsel so that objectives of the deal are communicated clearly. This allows the company’s attorney to understand the business and use that information to identify all material points of the transaction.
2) Identify Necessary Formulas
Most B2B contracts include some sort of formula. Whether the formula is a percentage earnout in a purchase agreement, a cost plus formula in a supply/distributor agreement, or something else, it is important to carefully draft the language of formulas so that mathematical mistakes are not made. Ambiguous formulas invite dispute, which is why it is important to use simple concise language that avoids confusion. Sometimes it is even appropriate to include the formula in both words and the equivalent mathematical expression to ensure the correct result.
3) Risks Inherent in Pricing and Payment
Every B2B contract should have clear pricing and payment provisions. The agreement should expressly state in active language who is required to pay what, as well as when and how payment is to be delivered. Some business contracts allow staggered payments. When a B2B agreement involves these staggered or subsequent payments, it is important to use specific dates. In addition, if pricing will vary over the life of the contract because of increased costs or unexpected fluctuations in the market, the contract’s pricing and payment provisions should state that.
4) Termination
While it may be easy to enter into a contract, it can sometimes be very difficult to exit one. For this reason, it is important to identify what sorts of circumstances should allow one or more of the parties to terminate the agreement. There is no one-size fits all approach for termination, which makes step 1 of understanding the business a crucial aspect of contract drafting when it comes to termination provisions. That being said, many B2B contracts state that termination may only be exercised when it is for “cause” or a “material” breach of the agreement. Regardless of the manner in which a business may terminate its contract in, termination will almost always be tied to a notice provision.
5) Notice
Virtually every contract includes a notice provision. When it comes to B2B contracts, a business should carefully consider what facts or circumstances will trigger an obligation to provide notice to the other party. When a notice obligation arises, the business should make sure to send notice in the proper form and to the proper person or entity. A notice may be required when a business terminates a contract or, in the alternative, extends the term of a contract that has proved beneficial for the company.
6) Remedies & Liability Limits
Evaluating liability exposure and determining how to limit it is a crucial aspect of contract drafting. B2B contracts frequently limit liability to only those instances of gross negligence or willful misconduct; however, if one party is assuming a substantial amount of risk by entering into an agreement, it may be appropriate for the contract to provide for special damages or a reasonable amount of liquidated damages. Sometimes, businesses will limit any contractual liability to the amount paid under the contract, and this may be a fair way of compensating the parties for any damages suffered.
Conclusion
These are a number of important drafting issues to consider when entering a B2B contract. In part 2, we will dive into various key issues that should be carefully considered. No matter the situation, it is very important for a business to retain an attorney to draft or review their contracts so that any risk associated with a transaction is handled as proactively as possible.
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*The material and information in this blog is for general informational purposes only. In no way is this information to be construed as legal advice for a particular situation.*