CM Magazine - 10 Seemingly Harmless Contract Clauses That Can Cost You — And How Organizations Can Mitigate the Negative Outcomes They Can Cause

One of the many duties contract managers regularly perform is to conduct a review of clauses (or terms and conditions) for a draft version of a contract. 
To properly complete this task, one must exercise a degree of meticulousness, possess a certain level of expertise, and have an awareness that goes beyond merely reading the words in a document to knowing the hidden ramifications of the terms and conditions that will be in the contract. 
When a thorough analysis is performed before a contract becomes enforceable,there are two major benefits:
First, when a determination is made in advance as to what terms and conditions in a draft contract are problematic or unacceptable, the organization’s potential liability can be reduced, or even eliminated completely, because the assessment was made early in the contract life cycle; and
Second, when the advantages, disadvantages, and potential risks are known prior to signing a contract and while performance is occurring, the chances of the organization encountering a surprise and incurring unforeseeable financial losses is lessened because the possibility of negative outcomes occurring can be anticipated. 
When a party to a contract submits the draft version of a contract to the other side to review and approve, there are often standard clauses that appear to be normal and routine. Such clauses can appear as boilerplate sentences in a government or commercial contract, and can involve a transaction for services, the sale of goods, or a hybrid of those two types of contracts. Such clauses may seem to be common and necessary—perhaps perceived by management and even in-house counsel as routine and standard for a contract, or logical, reasonable, and thus proper to the contract manager. 
However — while they may seem harmless, some “standard” clauses can, in fact, be detrimental. The fact that such clauses, despite their flaws, consistently reappear in both the draft and final versions of contracts demonstrates that contracting parties in many industries are aware of at least the existence of these clauses, and even believe them to be acceptable. When individuals do not recognize the contract clauses that are detrimental to their respective organizations, then parties to a contract are unwittingly creating their own difficulties by agreeing with terms and conditions that can cause unjust and inequitable outcomes that will have negative impacts for their organizations.   
10 Seemingly Harmless Contract Clauses 
The following are examples of clauses (or their variations) that often appear in contracts, which on the surface may seem to be harmless, and perhaps even reasonable, but actually can cause significant problems for organizations.   
#1. “In a dispute, the parties agree that the party prevailing in litigation will be awarded attorney fees (and other costs)….”
This clause seems logical and fair. However, it’s not as harmless as it seems.

Common Justifications for Inclusion

A likely reason for justifying this clause to be inserted in a contract, and for contract managers to agree that this clause is acceptable, is because conventional thinking suggests that if a court ruled in favor of one litigant, then the victorious party likely proved its case and justified its claims. Many who have not been involved in litigation before may understandably believe the losing side should rightfully be required to pay attorney fees and expenses since the side that won deserves to be financially rewarded. However, this clause should be unacceptable to both parties and not be in a contract for several reasons.  
The presumption may be that when a court decides a case, the reasoning was based on the actual and true facts and applicable law, which led to the correct result. The belief may be that a judgment will be made after both parties had a full and complete opportunity to present and argue their claims to a neutral fact-finder. Moreover, an assumption may also be made that any litigation that occurs will be in a court in which a fair and impartial hearing will be conducted. But — even if all of this occurred, there is no guarantee the decision by a court (at any level) will be correct, proper, or just. In a case involving a contract, this means the decision may also be inequitable.  
How It Could Cost You
1.) Litigation Is Uncertain and Unpredictable
As the adage goes, “a double-edged sword cuts both ways.” The drafter of the contract who desires this clause be included in the agreement needs to realize that the other party, who merely signed the agreement, may also use that clause against the drafting organization. As a result, wanting this clause in a contract may have the opposite effect of what was intended by the proponent of this contract term. 
Contract managers must also recognize there may be important factors regarding claims and arguments submitted by the parties to a contract that may be incorrectly or improperly given greater or lesser weight by a court. This can become evident especially to the party that loses and views the decision by a court as being “skewed.”
2.) Litigation Surrenders Rights
Another aspect to consider with litigation is that the power a party to a contract possesses is surrendered (at least to some extent) when the matter is turned over to a court to decide. Contracting parties should understand that when differences cannot be resolved and are submitted to a court for a decision, in theory their organizations’ rights are no greater than the opposing side’s, even though the law and the facts may strongly support their claims.
In addition, the possibility of the losing party to be ordered by a court to pay attorney fees to an opposing party can still occur — even without such a clause being in a contract. Consequently, agreeing to further relinquish organizational power by consenting to pay attorney fees and in effect facilitating a judge in creating a financial loss for the organization serves no beneficial purpose. Thus, there is no good reason to agree to include this clause in a contract. 
3.) “Unjust” Rulings 
Another aspect to consider is that even though one party to a contract may prevail in court, awarding attorney fees to the winning side may be very unjust. Even if the decision of a court is correct, both sides may have equally valid claims in a dispute. When there are “close calls” in a court hearing, agreeing in advance that the side that just barely won should reap a financial windfall of attorney fees can result in great inequity to the losing party.  
If litigants have valid and just claims that are difficult for a court to decide, then the judge will at least have an opportunity to provide a just remedy — e.g., that each side pays its own attorney fees and expenses. Also, when this clause is not in a contract, a judge will have no reason to feel constrained because of a prior agreement made by the contracting parties. Further, the judge will have no reason to be obligated to award attorney fees to the prevailing side, which can result in an even greater inequity. 
Recommendation
Due to the problematic nature of litigation, both sides should strive to first settle differences with each other instead of deciding that the first and best option is to proceed directly to a court.  There are situations when going to court is necessary.  So, a party to a contract should be prepared to litigate aggressively in court, but preferably after other alternatives like discussions, negotiations, mediation, and arbitration have failed.
The better approach with this clause is to strike (or not agree to) that term and condition and have the organization retain power by controlling its own destiny in litigation as much as possible. When this occurs, rights are not, in effect, forfeited in advance, with the organization being exposed to the possibility of additional monetary losses.   
  #2. “Each party agrees to resolve any dispute through arbitration and waives their right to a review, a trial, or appeal….” 
Common Justifications for Inclusion
Some contract managers may believe that since this clause keeps parties from litigating in court, both sides will be obligated to resolve differences by collaborating and resolving differences throughout the duration of the contract. This leads to thinking that litigating in court can actually be avoided should a dispute arise. 
At face value, this clause’s inclusion in a contract may seem desirable because it appears to ensure that good communication and an effective working relationship between the contracting parties is being maintained. Another possible inference from this clause’s inclusion is that arbitration is not as adversarial as a court hearing.  
How It Could Cost You
1.) Arbitration is also Uncertain and Unpredictable
As previously discussed, however, when a decision is made to seek legal redress through litigation in court, there can be unexpected negative outcomes. This same philosophy applies to arbitrations because the arbitrator may also make an incorrect decision about a matter. Further, there is always the possibility that a decision rendered through arbitration has no connection to, or is a misapplication of, the facts or law. Moreover, the arbitrator may not change his or her decision, no matter how much persuasive and compelling evidence is presented to the contrary. 
2.) Arbitration also Surrenders Rights
Like with a court, the ability of representatives of an organization to control the dispute resolution process is diminished when a matter is referred to arbitration. The fact that both parties to a contract may choose the arbitrator will not necessarily prevent an unjust or incorrect decision from being made. Also, the fact that both parties believe the arbitrator is neutral, and that the arbitrator claims the same, does not ensure the claims will be perceived accurately or that an equitable and correct decision will be made.
3.) Arbitration Limits Your Options
Another problem with this type of clause is that the alternatives for seeking correction of a mistake are limited or non-existent. If parties waive their right to a jury trial and the decision obtained through arbitration is not supported by the facts or law, then the losing party is “stuck” and must live with the erroneous decision. The more options an organization has in seeking redress and in obtaining an equitable result, the better.  
Recommendation
Arbitration can be a very effective dispute resolution method that can save a great amount of expenses and time. However, a clause that provides additional methods of recourse to achieve an equitable result — e.g., providing the option of going to court if arbitration fails — should be added to the contract.       
  #3. “A lawsuit, arbitration, or any other method of dispute resolution cannot be commenced until after performance is completed….”  
The problem with this clause is obvious: It presumes performance is guaranteed to occur. Of course, this may not happen.  
Common Justifications for Inclusion
The drafter’s motivation for including this term and condition may be to increase the likelihood of cooperation and fair dealing by parties throughout the duration of the contract. Another justification may be that a challenge by a party to the contract will disrupt performance and cause delays, which will further result in unwanted and unnecessary expenses for both sides.
How It Could Cost You
1.) Suspension/Forfeiture of Rights
In comparison to the two previous clauses regarding litigation, this clause goes to a greater extreme because a party’s right to enforce an agreement will be outright taken away at a time when a remedy is needed the most. In a worst-case scenario, the legal effect of this clause is that a party’s rights to enforce an agreement before performance begins are certainly suspended, if not altogether forfeited, for an indefinite period of time. In a best-case situation, the inherent power of a party to a contract is at least impaired because alternatives to remedies are restricted.  
2.) Adherence Is Not Always Possible
In some situations, adhering to this clause may not be possible, especially if there is (substantial) nonperformance on a contract. Both sides need to recognize that a situation may develop that requires a contract to be enforced before that agreement reaches a natural completion. This may require a lawsuit to be filed because no other alternative is available or feasible. Unfortunately, this clause prevents that from happening.  
Recommendation
This type of clause may initially seem to prevent litigation expenses and contentious disagreements from occurring between the contracting parties.  But given that circumstances involving business transactions are unpredictable and are often beyond the control of parties to a contract, even with the best of planning, this clause creates more problems than the difficulties it reduces.
The recommendation here is for there to be no agreement with this clause and that this term and condition be deleted in any review. 
#4. “The product or service is offered at a price that is less than, the same, or will not be greater than the price offered to another customer in a different contract….”
The inference in this clause is connected to the principle of “fair and reasonable pricing,” which is often seen in contracts with the U.S. federal government. The “fair and reasonable pricing” standard involves the price not being higher than other contracts for the same or very similar goods and services. This clause rarely appears in commercial contracts (but may be found in transactions with large national corporations that serve the general public).  
Common Justifications for Inclusion
The justification for not charging federal agencies prices that are higher than what other companies pay is easily understood.What contract managers should recognize, however, is that a contract is very seldom a replicate of another contract. Even if the product or service is the same as a prior contract and constitutes a recurring order, virtually all transactions have unique and separate characteristics that should override strictly adhering to the “fair and reasonable pricing” standard. 
How It Could Cost You
1.) No Two Contracts Are Exactly Alike
Regardless of who is the customer, the following are factors to analyze as to whether there is a need to insert and follow this clause:  

• The due date for delivery, 
• Whether an expedited delivery is required, 
• The quantity ordered, 
• The time and effort involved in fulfilling the terms and conditions of the contract, 
• The lead time needed to provide what the contract requires, 
• Any special conditions and requirements unique to this contract, 
• The normal price for what is to be provided, and 
• The subject matter of the contract.  

Given the number of criteria, there are few, if any, contracts that will be the same as an existing or prior contract. Thus, contract managers should not feel compelled to meet the requirements of this clause and must communicate to customers why this contract term is inapplicable or should not be strictly construed. 
2.) Compliance Expenses
If company assets are allocated and managed with the intent of meeting the constraints imposed by such a clause, the result can be unnecessary and avoidable monetary expenses. The greater the effort to comply, the greater the financial costs.  
Recommendation
There is no need to include this term and condition in a current or future contract if the clause is irrelevant. Nor should contract management personnel feel there is a requirement to design newly received contracts for the same subject matter into the parameters of prior contracts.  
#5. “The provisions of this contract shall survive the expiration of this agreement….” 
Common Justifications for Inclusion
Generally, this clause appears in commercial contracts more than in federal government contracts. Since the wording of this clause does not contain language that is extreme or outrageous, when reviewing a contract that contains this term and condition, the tendency may be to overlook it and not carefully consider its implications.  
How It Could Cost You
1.) Indefiniteness
The main problem with this clause is indefiniteness. One interpretation of this contract term can be that even though performance of the contract was completed and the obligations of the parties to the contract were finished, this clause creates a right in a party to make additional claims. The result is that the duration of the contract will be unnecessarily extended — consequently creating liability for one party (which is normally the party providing the services of goods) for unexpected losses after both parties have acted as though all terms and conditions in the agreement were fulfilled. 
Recommendation
The recommended solution is for a time limit to be placed in this contract provision. This will create certainty and define the limits as to when potential contractual obligations end.   
#6. “The contracting party acknowledges that any property entered into or taken will be accepted in an ‘as is’ condition….” 
This type of clause will most likely appear in contracts in which services or products are provided on-site. 
Common Justifications for Inclusion
Contract managers performing due diligence may believe an investigation of this clause is unnecessary. This is especially true if the contract manager is advised by individuals — who are known to be reliable — that site inspections were conducted and that a satisfactory and safe work condition exists, so personnel can enter and perform work authorized by the contract.   
How It Could Cost You
An astute contract manager should recognize that information provided about the condition of a site may have been correct at the time the information was initially provided (and this includes up to the last moment before the contract is to take effect), but there is always the possibility the condition of property or a location where contract work is to be performed may have changed after a site inspection and just before a contract begins, or there may even be conditions present at the site that are impossible to know — even with a reasonable site inspection. 
1.) Safety
The most noticeable problem with this clause is that the drafter of the contract, by inserting this term, is exculpating their organization from any unsafe condition on the property. The burden of ultimately verifying the safety of property or a location is shifted from the owner (who has a possessory right) to the party who does not have the right to access, control, or occupy the premises. The drafter of the contract may honestly and in good faith, but incorrectly, believe that the condition of where contract work is to be performed is “safe.” Since the risk is on the contracting party who does not own the property, this clause should not be accepted and should be redlined (and deleted). 
2.) “Differing Site Conditions”
Another problem with this type of clause is that it does not reasonably provide a path for recovery of added costs caused by “differing site conditions,” which are either:
“Subsurface or latent physical conditions at the site which differ materially from those indicated in [the] contract,” or
“Unknown physical conditions at the site, of an unusual nature, which differ materially from those ordinarily encountered and generally recognized as inhering in work of the character provided in the contract.”
Recommendation
The recommended solution for the safety issue is for a clause to be inserted into the contract that states nothing will be verified as “safe” for purposes of fulfilling contract obligations until the party entering a site determines a hazard does not exist. Concerning the differing site conditions issue, the “as-is condition” type of clause does not allow for a contractor to recover the added expenses it will likely incur should a differing site condition be encountered at the site after commencing performance; therefore, standard “differing site conditions” clauses should be inserted. 
#7. “Payment may be withheld until the dispute is resolved….”
Common Justifications for Inclusion
This clause appears to create a situation that is equitable in circumstances involving a dispute. After all, a party to a contract who does not perform as required should not receive payment, or at least in the full amount. However, even if a contract was not breached, this type of clause can still delay equity and justice. 
How It Could Cost You
1.) Allows for Payment to be Withheld Unjustly/Incorrectly
The problem with this clause is that the dispute may not be based on a good faith claim or may be based on a claim that is a mistake. Thus, the withholding of funds may be justified or unjustified.  
2.) No Payment
Alternatively, a situation can occur in which there is no payment for the benefits of services that were already provided or for products received. In “contracts and remedies” law, this implicates the concepts of expectancy, restitution, and reliance damages, which can create litigation and further result in expenses and losses that were not foreseen by the contracting parties at the outset of the contract.
3.) The Power to Pay at Discretion

Another problem with this type of clause is one party to a contract becomes vested with the power and has the discretion either to pay or to not disburse funds. Conversely, a situation can occur where the other party, who has performed according to the specifications of a contract, is placed at a disadvantage and does not receive funds rightfully owed.  
Recommendation
The recommended solution is to modify this clause so the entire amount of any disputed payment is placed into an escrow account rather than being withheld and kept in the possession of one party to the contract. This creates transparency and ensures the withholding of funds is not based on invalid reasons (e.g., funds not being available). 
#8. “Parties are not relieved of contractual obligations that were in effect before the cancellation or termination of a contract….”
Common Justifications for Inclusion
There is a good reason for this type of clause being in a contract: If a party performs properly and the contract is not completed, there needs to be equitable compensation.  
How It Could Cost You
1.) Vagueness
Contract managers should note that the wording of this type of clause is frequently vague. This vagueness can create uncertainty and conflict between the contracting parties concerning what obligations are still in effect and if and how associated costs will be reimbursed. 
Recommendation
More details need to be provided with this clause. Furthermore, the parameters of the areas of responsibility need to be established. For this to be accomplished, both sides to a contract need to effectively communicate their expectations so the contract can come to a natural end without costly expenses.
Specifically, duties and responsibilities should be clarified in the contract so an accounting can be made of all performance issues and remaining financial claims and liabilities. When that occurs, the party that is owed money can receive funds. In turn, monetary losses can be avoided, identified, or reduced. 
#9. “The parties are independent contractors with no employer-employee or agency relationship being established…[and] all subcontractors must first be approved before being hired to perform work….”    
Draft contracts typically have several sentences, paragraphs, or sections that cover independent contractors — including clauses that contain this type of language.
Common Justifications for Inclusion 
Contracting parties are free to structure their agreements regarding independent contractors according to their needs and desires. For service contracts with the federal government, for example, certain contract language concerning independent contractors is mandated for inclusion to clarify the relationship between government personnel supervising contractor personnel. 
How It Could Cost You
1.) Inconsistency with Authority Versus Responsibility
When a draft contract is being reviewed, contract managers need to determine whether the parties to a contract are actually free and independent or if one party’s performance is severely controlled in some areas. Concerning this example clause, there is a contradiction concerning the “independence” of the independent contractor and its freedom or authority to select and use its own subcontractors — which is restricted or hampered under this language. This can create incongruity and conflicts that can result in the need for a contract to be amended or modified later. Depending on the nature of the issue involved, this can cause a delay in performance with the possibility of extra funds being expended causing unexpected, unnecessary monetary losses.
Recommendation
Contract managers should perform a thorough review of these types of clauses when analyzing the draft contract and confirm the language ensures that independent contractors are, in fact, independent and that requirements are not contradictory.   
#10. “The entirety of this contract consists of an organization providing services or goods and an organization paying a total price for the services or goods provided….”
Common Justifications for Inclusion
This clause adequately describes all the elements and the purpose of the contract. Thus, the reader of this document should be able to determine the extent of the purposes of this contract.
How It Could Cost You
1.) Does Not Represent Complete and Entire Agreement/Final Version of the Understanding Between the Parties
Arguably, this clause alone makes the contract incomplete and subject to further litigation and costs and expenses. Even with this clause present, the possibility exists that a claim can be made by a party to the contract that the document that was thought to be the contract is not in effect, was partially or totally replaced, or was superseded with a later written version of the contract. This subtle, seemingly harmless omission from a contract could result in extra monetary losses for an organization. 
Recommendation
To ensure a contract is complete and is the correct and final version of the understanding between the parties, contract managers should ensure a conspicuous “merger clause” is also in the contract. The merger clause states the contract is the full, final, complete, and entire agreement of the parties and that no prior oral or written or contemporaneous oral statements are admissible to add, vary, or contradict the terms of the written agreement. 
Instead of a clause just describing what a contract is about, there needs to be a clause that states when the legally enforceable rights of the parties to a contract begin and end.
 
Conclusions
For some contract managers, the defectiveness of some of these clauses may be obvious and easy to notice and reject. Yet, even if some contract managers can identify outrageous and obviously unacceptable terms and conditions, that will not necessarily stop another contracting party from attempting to insert overreaching and oppressive clauses on the chance that such terms and conditions might be unwittingly accepted.         
Additionally, individuals in organizations may consider some contract clauses to be “normal” for conducting business. Consequently, some terms and conditions that are disadvantageous to an organization are overlooked or ignored. The fact that certain contract clauses are desired by one party and traditionally accepted by another party does not require those terms and conditions to be accepted outright — or to be viewed as valid — without scrutiny.  
A detailed examination of the terms and conditions should identify any subtle, damaging consequences that can occur after a contract is executed. A contract manager can greatly enhance his or her own value by recognizing, identifying, and advising the organization’s hierarchy about the disguised traps hidden in the clauses of contracts that can be very costly and expensive. CM
 
John B. Noone Jr., CPCM, CFCM, CCCM, Attorney at Law
Adjunct Professor, California Southern University, Department of Regulatory Compliance and Risk Management.
Previously served as a contract administrator in the following industries: Property (Facility) Management, Transportation Services, Renewable (Wind Energy), Aerospace and Defense, and Energy Management.
Secretary, NCMA Orange County Chapter.
All information contained within this article is based on and was developed from the author’s study and research involving the subjects of contracts, remedies, torts, and property from law school; from study materials for the three certification programs offered by NCMA; and from the author’s personal experience working for different organizations performing tasks within the entire contract life cycle for the U.S. federal government, commercial (domestic), and international customers.       
 
Endnotes
1.)  Note: An “enforceable” contract possesses the following four elements: 1) mutual assent of the parties, 2) adequate consideration, 3) capacity of the parties to enter into a contract, and 4) legality of purpose.
2.)  Unfortunately, the purpose and rationale for supporting this pricing philosophy goes beyond the scope of this article. 
3.) Federal Acquisition Regulation (FAR) 52.236-2(a)(1)–(2).
4.) E.g, FAR 52.236-2, “Differing Site Conditions,” and FAR 52.236-3, “Site Investigation and Conditions Affecting the Work.” (See, generally, FAR 36.502 and 36.503.)
5.) E.g., FAR 37.104(c)(1).