Business to Business (B2B) Contracts - Important Legal Issues Part 2
This blog is part 2 of our series on learning about the important legal issues within business to business (B2B) contracts. As we have previously mentioned, business and commercial contracts are a useful tool for ensuring that promises made are promises kept. While every contract is drafted with an eye towards achieving the company’s big picture goals, every contract also has its own particular issues and details that can significantly alter a company’s legal obligations and rights. It is important to pay special attention to these issues in order to avoid potential pitfalls, properly allocate risk, and advance the company’s objectives.
For more information on making sure your business is legally sound, be sure to check out our blog series on avoiding key legal mistakes in startup companies.
Important Legal Issues for B2B Contracts, Part 2:
1) Indemnification
Before drafting an indemnification provision, it is important to consider what could go wrong or result in unexpected liabilities for the businesses looking to contract with each other. With that in mind, an indemnification provision may be used to allocate the risk and responsibilities for such liabilities to a particular party to the contract. At a minimum, an indemnification provision should be sure to state two things: (a) what claims are covered and (b) how those claims are handled.
Most businesses do not want to be on the hook for another business’s negligence or wrongful conduct, and an indemnification provision is certainly one way to achieve that. Other terms that may be included within an indemnification provision are caps on the amount of money that one party will be obligated to pay out and a limitation on the amount of time for a party to seek indemnification under the contract. For example, an indemnification provision within a B2B contract could say that the companies only have one year to seek indemnification from the other company.
2) Warranties
Terms addressing warranties are found in virtually every business and commercial contract. Because a failure to comply with a warranty provision can open a company up to substantial liability, it is important to ensure that warranties are properly drafted and reflect the intent of the parties. When it comes to B2B contracts, a business should carefully consider the products or services that are to be provided under the contract and then consider what warranties will be offered or expected.
For example, in a contract where one business is licensing software or technology from another business, it may be desirable to include a warranty stating that the owner of such software or technology has the authority to give the license. The last thing a business wants is to spend time and money on licensing a crucial piece of software or technology only to get a cease-and-desist letter from an outside company saying the contract’s license is unauthorized.
3) Dispute Resolution
Sometimes relationships break down. Regardless of the reasons for the breakdown, it is important for businesses to consider how to resolve disputes with one another. Binding arbitration provisions are quickly becoming the norm in B2B contracts around the country. However, the decision on whether to include an arbitration provision within a B2B contract is one that should be made on a case-by-case basis. While arbitration can sometimes be quicker than traditional litigation in court, arbitration awards are typically subject to very limited rights of review and appeal. For that reason, a business may prefer to try their dispute in court to make sure they have the ability to appeal a wrong decision.
4) Assignment
An assignment is the transfer of an existing contractual right from one party to another. For example, a company may assign its right to receive payment under a contract to one of its subsidiaries or service providers. Some B2B contracts limit the ability of businesses to assign contractual rights. Depending on the circumstances it may be more or less favorable to permit assignment. Because of this, the company should carefully consider what it expects to receive under its business contracts and communicate that to its attorney. This will allow the company’s attorney to limit assignment so that the company’s rights and interests are not impaired by the business they choose to contract with.
5) Survival Clause
Survival clauses determine what rights and obligations survive the termination of the contract. In other words, once the life of the deal comes to an end, what rights or obligations do the businesses’ want to survive? In most B2B contracts, the companies want confidentiality and recordkeeping obligations to survive for a certain period of time, say three years. However, other businesses may also want the contract’s warranties to survive beyond termination of the agreement. It is important that the parties to a contract expressly state what terms they want to survive after the termination of the contract, otherwise they risk forfeiting such rights.
Conclusion
These are a number of the important drafting issues to consider when entering into a B2B contract. Be sure to check out part 1 of this series in case you missed it. In that blog post we discussed additional contract provisions that are important to B2B contracts. No matter the situation, remember that it is important for a business to retain an attorney to draft or review its contracts so that any risk associated with the deal is minimized and the company’s objectives are furthered.
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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.*