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5 Key Provisions to Address in Commercial Agreements

06.16.2016

Commercial agreements come in a variety of types and kinds, but most have certain common provisions that should be carefully reviewed in the context of the underlying transaction covered by the agreement. Listed below are 5 of those common provisions that sometimes go unnoticed or are not given proper attention when drafting or reviewing a commercial agreement.

1. Confidentiality Provisions –The confidentiality provisions are often worded as unilateral, meaning only one of the party’s confidential and proprietary information is protected by the terms of the agreement. In most transactions, both parties could benefit from a mutual or reciprocal confidentiality provision because both parties usually exchange some amount of sensitive information or data with the other party. The confidentiality provisions should, therefore, be carefully reviewed and revised to make sure that confidential and proprietary information of both parties is protected by the terms of the agreement. Attention should also be given to making sure appropriate exceptions are made for information that is publicly available, already known, or independently developed by a party without knowing or using the other party’s confidential information, or required to be disclosed by a party pursuant to a court order.

2. Indemnity Provisions – Many commercial agreements contain indemnification provisions that are also unilateral and only require one party to indemnify and hold the other party harmless for certain claims, causes of actions, damages, costs, and expenses (including attorneys’ fees and court costs) incurred by the other party arising out of the agreement. Depending on the nature of the transaction, it may be appropriate and reasonable to make the indemnity provisions mutual and reciprocal so as to protect both parties from claims attributable to the other party. In many instances, the indemnity provisions might also require a party to carry certain types of insurance to cover or help fund that party’s indemnification obligations, which generally include naming the other party as an "additional insured" under such insurance policies and also requiring the insurer to waive subrogation rights against the other party so as to not defeat the purpose of the indemnification provision. If the indemnification obligations are made mutual and reciprocal, both parties should be required to name the other party as an "additional insured" on their respective insurance policies and also have their insurer waive subrogation rights against the other party.

3. Consequential and Special Damages – If the agreement does not contain any limitation on damages, when one party breaches the agreement the non-breaching party may be able to recover consequential or special damages from the party that breached the agreement. Some examples of consequential or special damages are lost profits, punitive damages or damages incurred by the non-breaching party from a third party claim, all of which might not be foreseen or expected by the party that breached the agreement. Consideration should therefore be given to adding a provision to the agreement that would have each party waive any claim against the other for consequential or special damages.

4. Product Warranties – In transactions involving the sale of products, the seller will usually be required to provide a warranty that the products are free from defects. Any such warranty should be carefully reviewed by the seller to make sure it complies with the seller’s standard warranty terms for such products, including the duration of the warranty and appropriate exceptions to warranty coverage such as normal wear and tear, misuse by the buyer, improper maintenance or service by the buyer, or repairs made to the product by someone not authorized by the seller. The seller should also make sure that the warranty provisions disclaim all other warranties (express or implied), except those specifically given by the seller for the particular product.

5. Audit Rights – In certain transactions one party to the agreement sometimes requires the right to independently audit the other party’s books and records relating to the services or products provided under the agreement. If audit rights are given to the other party, the other party should be required to keep all such information confidential and to not disclose such information to third parties. Consideration should also be given to excluding certain sensitive information from the audit, such as cost structure, profit margins, trade secrets, or other proprietary information except as reasonably necessary for the other party to be able to effectively audit the other party’s performance and/or charges under the agreement.

There are many other provisions and concepts that are similar among commercial agreements for various types of transactions. However, there are also provisions and concepts that are transaction specific, so careful review and drafting is recommended with respect to any commercial agreement. Please contact a member of our Business and Transactions Practice Group if you would like to have a commercial agreement prepared or reviewed.

by Marlon M. Lofgren

Attorneys

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