Contract Review – An Opportunity to Avoid Those Gotcha Moments

Why is a Periodic Contract Review Important?

Business relationships evolve.  Has your company…

• Expanded its business relationship with a counterparty but continued to use the same negotiated contract from that first initial project?
• Completed a sale transaction, taking on contracts that were already in place with the acquired target company?
• Undergone a restructuring of the corporate organization, adding or combining affiliates?

All of the above situations present an opportunity to analyze your current contract terms, updating the contract parties and notice provisions as well as ensuring that the master set of terms matches the risk profiles for the services or goods being acquired. 

Courts generally will enforce contract terms as written.  As the Texas Supreme Court recently pointed out, “we do not protect parties ‘from the consequences of their own oversights and failures in nonobservance of obligations assumed.’’ James Construction Group, LLC v. Westlake Chemical Corporation, —S.W.3d— 65 Tex. Sup. Ct. J. 1096   (Tex. 2022) (citing Dorroh-Kelley Mercantile Co. v. Orient Ins. Co., 135 S.W. 1165, 1167 (Tex. 1911).  Texas courts will “regularly enforce unambiguous contract language agreed to by sophisticated parties in arms-length transactions.” Id. (citing Chalker Energy Partners III, LLC v. Le Norman Operating LLC, 595 S.W.3d. 668, 672-673 (Tex. 2020). 

Taking the time to review certain legal provisions and identifying areas for improvement (or even update outdated contact information) may lessen the possibility of missed opportunities and deadlines and other “gotchas” if a dispute arises in the future. 

Contract provisions that may warrant further review are:

1.  Who are the Contract Parties to the Contract? Often times, parties may contract at the parent entity level only. While this may work for a master agreement,¹ further review may be warranted if the contract does not include affiliate language or has placed obligations on a parent entity that is not the counterparty for most of your operational contracts.

2.  Where are your Contract Notices Going? Have you looked at your notice provisions lately? In addition to today’s increasing use of email and text messaging, often notice provisions still include fax numbers as a notice option. In addition, notice provisions likely list named individuals and their email addresses for notices. As the past few years has reminded us, personnel do change jobs, even if such individual stays with the company. If notices are to be sent to named individuals or specific email addresses, failure to update this provision could lead to notices being delayed (or circulating within the company’s mail system). As notices often trigger unforgiving deadlines within the contract, including, but not limited to cure opportunities, having the most up-to-date notice information is critical for a company.

Practice Pointers: 

• Replace the use of facsimile and fax numbers with the notice options your company uses
• Direct notices to the head of a department or by job title
• If an email address is used, make sure that the email address is monitored or include a second notice party under the contract, such as the legal department within the company

3.  Does the Form of Agreement Work for this Scope of Work?

Is the intent to have a master contract in place to set out the agreed terms and conditions for a specific set of work scopes? Would a separate agreement be better on a project-by-project basis? Questions to consider are:

a.  Will there be Work Orders?² If there is a master agreement, does it obligate any party to perform? If work orders are to be subsequently entered into by the parties, does the work order stand on its own as a separate contract? Does the work order refer to the correct master agreement?

b.  Are Oral Orders Acceptable? Does the contract allow for oral orders without written confirmation? Are there processes in place to document oral orders?

c.  Which Contract Prevails? Does the master agreement control over any subsequent work order? Are changes limited to certain commercial terms specifically identified in the work order?

d.  How Many Amendments So Far? How many times has the agreement been amended? Multiple amendments to a contract could lead to conflicting provisions. Consider whether the contract should be amended and restated, capturing the agreed terms.

e.  What About Those Definitions? Are there any undefined terms? The risk of undefined terms is that a court may fill in the gap on the undefined term with something not considered at the time of contract formation by either party. Do any of the defined terms refer to or incorporate applicable law? While this may be the only way to obtain an agreement, understanding that a reference to applicable law could cause unintended consequences and re-allocate the risk allocation agreed to during contract negotiations and formation.

4.  Do the Indemnity Provisions Match the Risk Profile for this Scope of Work? Is the risk profile under the work order the same as the risk profile under the master agreement? A master agreement may be negotiated for a specific type of work or services, which allows affiliates to use an already agreed set of terms. However, as the parties expand their business relationship, evaluating whether the risk profile of a new business venture fits under the already agreed indemnity scheme is paramount. Economic and insurance considerations also need to be evaluated to ensure that the new business venture and indemnity scheme does not cause gaps in a company’s indemnity and insurance framework.

Practice Tip:  Review the indemnity and insurance provisions to ensure that the risk profile of the works order matches the agreed set of master terms.  If not, negotiating a separate agreement to address the specific risk profile.