MITIGATING LITIGATION RISK: FORREST’S FIVE CONTRACT PROVISIONS THAT COULD SAVE YOUR BUSINESS

By James Forrest

Last week, I had the privilege of speaking to executives from the Triangle and surrounding areas at the Entrepreneur’s Conference at Durham’s Carolina Theater.  For my presentation (“Mitigating Litigation Risks:  Key Contract Provisions that Could Save Your Business”), I focused on some key contract provisions that can be included in a company’s contract templates that can substantially mitigate legal risks:

  • Limitation of Liability
  • Non-solicitation
  • Forum
  • Confidentiality
  • Warranty Disclaimer

Limitation of liability is a must-have contractual component for any business, much less a start-up company in growth mode. These types of provisions purport to limit the contractual party of one or both parties.  If one party breaches the contract, the breaching party may sometimes be able to fall back on a provision like this as a back-stop (or limit) in terms of the amount of damages that can be recovered by the non-breaching party.  This provision has a huge deterrent effect as well (i.e., preventing litigation from starting because the amount of damages that can be recovered is limited).

Non-solicitation provisions are critical for protecting businesses from external threats that originate from within.  These provisions limit potential damage to a company from former associates, such as full-time employees, contractors, and others. People in these relationships have access to the core DNA that drives a company’s business—the intellectual property that drives products, services, and future planned innovations, the employees who are key to the company’s success, as well as private, confidential information on key customers and prospects.  It’s very rare that companies reach levels of sustainable success with the original group of people who launch the enterprise, so it’s very important to have everyone involved adhere to non-solicitation agreements that keep them from soliciting employees and customers of the company after leaving the company.

Forum is a less complex provision.  Companies want to be able to defend themselves on their home turf.  Forum protects a company’s right to do just that—conduct court business, as necessary, within a certain geographic area, such as its home state or home county. The reasons that this is advantageous should be obvious—companies can hire local attorneys to protect them, have greater ease of filing and responding to legal matters due to proximity, and make legal action by others just a bit less convenient and worthwhile in the process.

Confidentiality is closely related to the notion of non-solicitation—while non-solicitation restricts the employee from soliciting key employees, vendors or customers of the company, the confidentiality clause requires that the employee keep the Company’s sensitive information confidential.  When parties enter into an agreement, companies should be sure that everyone understands which information, whether it involves intellectual property of innovation initiatives or customer information, is to be held in confidence by all participants in the relationship. Confidentiality provisions achieve this by delineating that confidential information is to be used to accomplish certain objectives, and not to be used for any other purpose whatsoever.

Finally, warranty disclaimers are another liability-limitation mechanism in contracts.  Companies never want to leave themselves open to the implied warranties that may be available for the benefit of a consumer.  A good contract should clearly identify the specific warranties being made, and then disclaim all others. Many companies have gone about the work of providing a good to a consumer, only to be held hostage by the customer making greater demands of guarantee/warranty than the provider intended. When companies properly articulate warranty disclaimers within contracts they leave no room for this type of behavior.

There are many ways that companies can manage risk while going about with assertive business development efforts. Consult with your business attorney to explore the above mentioned and other contracting considerations and provisions that can afford you the proper litigation protection as you grow your company.